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Developing Countries and Challenges of Climate Change- Related PPMs within WTO Institutions by Véronique Bastien A thesis submitted in conformity with the requirements for the degree of Master of Laws Graduate Department of Law University of Toronto © Copyright by Véronique Bastien 2013
Transcript of Developing Countries and Challenges of Climate Change ... · Developing Countries and Challenges of...
Developing Countries and Challenges of Climate Change-Related PPMs within WTO Institutions
by
Véronique Bastien
A thesis submitted in conformity with the requirements for the degree of Master of Laws
Graduate Department of Law University of Toronto
© Copyright by Véronique Bastien 2013
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Developing Countries and Challenges of Climate Change-Related
PPMs within WTO Institutions
Véronique Bastien
Master of Laws
Graduate Department of Law University of Toronto
2013
Abstract
I present the current state of the debate surrounding processes and production methods (PPMs)
related to climate change in the context of developing countries and their relationship with the
WTO institutions, both the dispute settlement bodies and the committees. The analysis first
outlines a topography of PPMs and three interconnected features: their economic feature, their
public policy objectives and their extraterritorial nature. It then examines the consistency of
PPMs with the principle of national treatment under WTO law and assesses how the WTO
institutions have dealt with the conflictual nexus of climate change and trade as reflected in
PPMs. Using three contemporary case studies of climate change related PPMs, I illustrate the
effectiveness, and lack thereof, of the WTO institutions on this matter. Lastly, I explore
developing countries’ participation in the WTO institutions in regard to climate change PPMs.
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Acknowledgments
Merci à vous qui avez cru en moi et qui m’avez appris que rien n’est impossible.
I would like to express my sincere thanks and gratitude to Professor Michael Trebilcock who
gave me unfaltering support and advice. Thank you for having accepted to be my supervisor and
for having shown confidence in my ability to start and finish this project.
I am indebted to Pierre Marc Johnson who showed continuous support and always encouraged
me to push my limits. I am also forever grateful for so many friends whose camaraderie and
general good humour have made this return to university after 10 years a cherished experience.
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Table of Contents
Acknowledgments ................................................................................................................................. iii
Introduction ....................................................................................................................................... 1 1
A Topography of PPMs .................................................................................................................. 5 2
2.1 The Traditional Debate…or what is left of a controversy ............................................................. 7 2.2 Three Features of PPMs ........................................................................................................................ 9
2.2.1 Economic Concerns ........................................................................................................................................ 10 2.2.2 Non-Economic Policy Concerns ................................................................................................................ 14 2.2.3 Extraterritorial element ................................................................................................................................. 15
PPMS under the WTO Institutions ........................................................................................... 18 3
3.1 WTO Rules ............................................................................................................................................ 18 3.1.1 Non-discrimination under National Treatment ..................................................................................... 19
3.1.1.1 Tax Measures .............................................................................................................................................................. 20 3.1.1.2 A Specific Eye on BTAs ......................................................................................................................................... 23
3.1.2 Regulatory Measures ..................................................................................................................................... 26 3.1.3 Three Suggested Approaches for PPMs .................................................................................................. 29
3.1.3.1 PPMs and the Objective Approach ...................................................................................................................... 30 3.1.3.2 PPMs and the Contextual Approach ................................................................................................................... 34 3.1.3.3 PPMs and the Economic Approach ..................................................................................................................... 35
3.1.4 General Exceptions under Article XX ..................................................................................................... 36 3.1.4.1 Article XX(b) .............................................................................................................................................................. 37 3.1.4.2 Article XX(g) .............................................................................................................................................................. 38 3.1.4.3 The Chapeau ................................................................................................................................................................ 39
3.1.5 Technical Barriers to Trade Agreement .................................................................................................. 40 3.1.5.1 Technical Regulations and Standards ................................................................................................................. 40 3.1.5.2 Less favourable treatment under the TBT Agreement .................................................................................. 42 3.1.5.3 Unnecessary obstacles ............................................................................................................................................. 44 3.1.5.4 TBT and PPMs ........................................................................................................................................................... 45
3.2 WTO Committees ................................................................................................................................ 50 3.2.1 TBT Committee ............................................................................................................................................... 51
3.2.1.1 PPMs in the TBTC .................................................................................................................................................... 53 3.2.2 Committee on Trade and Environment .................................................................................................... 55
3.2.2.1 Environmental Goods .............................................................................................................................................. 56 3.2.2.2 Ecolabelling ................................................................................................................................................................. 58
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3.2.2.3 BTAs .............................................................................................................................................................................. 60 3.3 Conclusion ............................................................................................................................................. 62
Three Case Studies ........................................................................................................................ 63 4
4.1 US Proposal of a Carbon Tax ............................................................................................................ 63 4.1.1 Overview of Carbon taxes ............................................................................................................................ 63 4.1.2 Leakage and Loss of Competitiveness ..................................................................................................... 65 4.1.3 US Carbon Tax Proposal .............................................................................................................................. 67
4.1.3.1 The Carbon Fee and its WTO Consistency ...................................................................................................... 69 4.1.3.2 The Carbon Equivalency Fee and its WTO Consistency ............................................................................. 70 4.1.3.3 Expiry of Carbon Equivalency Fee ..................................................................................................................... 73 4.1.3.4 Could the CPA be saved under Article XX? .................................................................................................... 74
4.2 EU’s Sustainable Criteria for Biofuels ............................................................................................ 76 4.2.1 Renewable Energy Directive ....................................................................................................................... 79 4.2.2 Are the Sustainable Criteria Non-Discriminatory under Article III:4? ......................................... 80
4.2.2.1 Sustainable Biofuels Like Unsustainable Biofuels? ...................................................................................... 80 4.2.2.2 Less Favourable Treatment .................................................................................................................................... 83 4.2.2.3 Article XX .................................................................................................................................................................... 85
4.2.2.3.1 Article XX(b) .................................................................................................................................................... 86 4.2.2.3.2 Article XX(g) .................................................................................................................................................... 87 4.2.2.3.3 Article XX - Chapeau ..................................................................................................................................... 88
4.3 The French Grenelle Ecolabelling .................................................................................................... 88 4.3.1 Nature of Ecolabels ........................................................................................................................................ 90 4.3.2 Grenelle Laws 1 and 2 ................................................................................................................................... 93 4.3.3 The Hypothetical New Grenelle ................................................................................................................. 95
4.3.3.1 New Grenelle Consistency with the TBT Agreement ................................................................................... 96 4.3.3.1.1 National Treatment .......................................................................................................................................... 97
Like Products ........................................................................................................................................... 97 4.3.3.1.1.1
Less Favourable Treatment ................................................................................................................. 98 4.3.3.1.1.2
4.3.3.1.2 Least Trade Restrictive under Article 2.2 ................................................................................................ 99
Developing Countries and PPMs ............................................................................................. 101 5
5.1 Developing Countries and the WTO Institutions ........................................................................ 103 5.2 Illusory or Real? Challenges of Climate Change PPMs for Developing Countries ............. 107
5.2.1 Green Protectionism ..................................................................................................................................... 108 5.2.2 Restrict or Impede market access ............................................................................................................ 110 5.2.3 Developing Countries as “Standard Takers” ....................................................................................... 113
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5.3 New Strategy Ahead for Developing Countries ........................................................................... 116
Conclusion .................................................................................................................................... 119 6
Bibliography ....................................................................................................................................... 121
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Introduction 1Processes and production methods (PPMs) are fundamental in developing low energy technology
and transitioning from fossil fuel to cleaner energy. They are part of the policy toolkit that can
incentivize countries to seek and implement alternative climate-friendly processes, mechanisms
such as cap and trade, renewable energy, ecolabelling, and carbon taxes. Facing inaction at the
multilateral level and growing domestic pressure to act on climate change, countries have
increasingly taken matters into their own hands by implementing unilateral measures to address
climate change concerns. The interface between trade and climate change captures the difficulty
of balancing trade liberalization and the right to self-regulate (domestic regulation autonomy),
which is embodied in PPMs. In the climate change context, it is impossible to ignore PPMs.
PPMs have been the object of much debate and controversies in trade for some time and they
have continued to cultivate a bad reputation of distorting trade and restricting market access
among certain countries. WTO Members (Members) have discussed PPMs in the negotiating
rounds of the WTO and at the committees level. They have also challenged PPM measures, but
PPMs continue to suffer from their bad reputation and little progress within the WTO seems to
have occurred to change the situation.
This thesis sets out to bring up to date the state of affairs with regard to PPM measures in the
climate change context by focusing on three examples, each reflecting the interface and specific
traits of PPMs and trade. The common thread running through these examples is the impact on
developing countries. The question posed is the following: has the WTO as an institution been
responding effectively to the tensions created by the growing number of climate change PPM
measures that afflict developing countries? Clean technology progress, combined with actions to
address climate change, has continued to fuel developing countries’ concern about PPM
measures imposed by developed countries. While there are indications that the dispute settlement
bodies (DSB) would consider PPMs in the legal analysis under the national treatment principle
of the GATT and the TBT Agreement, the discussions at the committees such as the Technical
Barriers to Trade Committee (TBTC) and the Committee on Trade and the Environment (CTE)
are evidence of an embedded reluctance with regard to PPM measures. This reluctance may
reveal a broader uneasiness about addressing climate change under the chapeau of trade.
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The thesis is divided into four chapters. Chapter 1 presents a topography of the controversy
surrounding PPMs in international trade law. Product-related PPMs concern the physical
characteristics of a product whereas non-product-related PPMs pertain to the effects on the
production and processing stage. The chapter then explores three prominent features of PPMs
that highlight the interconnectedness with climate change problems: 1) economic nature, namely
that PPMs can act as trade barriers (an underlying protectionism); 2) PPMs as a tool to uphold
legitimate objectives; and 3) extraterritorial characteristics.
PPMs embody the balance between the right to regulate and the need to address broader public
policy concerns that may have an impact on trade. They also represent economic rationales
driving states to regulate certain products, and consumers to prefer some products to others,
thereby influencing supply and demand. However, PPM measures are often perceived, mostly by
developing countries, as impeding market access and competitiveness. The implementation of
PPMs aims to promote more environmentally sound activities and to ensure that domestic
climate-change policies and incentives do not inadvertently undermine other environmental
objectives.1
Chapter 2 explores how PPMs have been treated in the WTO institutions both within the DSB
and the Committees. The first section analyzes the relevant legal WTO framework with a special
emphasis on the national treatment principle under the General Agreement on Tariffs and Trade
(GATT) and the Technical Barriers to Trade Agreement (TBT Agreement). It focuses on the
national treatment obligation of the GATT (Article III) and the general exception (Article XX)
and Articles 2.1 and 2.2 of the TBT Agreement.
In addition to the legal analysis of the compatibility of PPMs under these specific provisions, the
chapter draws on Diebold’s approach to including PPMs in the “likeness” analysis under Articles
III of the GATT and 2.1 of the TBT Agreement and offers three approaches, namely i) an
objective approach encompassing the four traditional criteria (physical characteristics, end use,
consumers’ preference and tariff classification); ii) a contextual approach which draws from the
regulatory purpose approach; and finally, iii) an economic approach.
1 Evdokia Moïsé & Ronald Steenblik, “Trade-Related Measures Based on Processes and Production Methods in the Context of Climate-Change Mitigation”, OECD Trade and Environment Working Papers, 2011/04, OECD Publishing.
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The second part of Chapter 2 reviews the discussions occurring in the TBTC and CTE. Members
have used these Committees to engage in dialogue on PPMs by exchanging information and
raising concerns as they relate to climate change PPMs. Developing countries seem to be
entrenched in their long-standing positions that PPM measures have negative impacts on their
market access and they incur higher costs to comply with such measures, which deters or
impedes many of their exports. On the one hand, the Committees provide a platform that enables
countries to exchange information and thereby increase the understanding of unilateral climate
change measures, which may decrease recourse to dispute settlement mechanisms and afford an
easier opportunity for developing countries to voice their concerns. On the other hand, the review
of the discussions on climate change-related PPMs reveals that only a few developing countries
in fact participate actively in these discussions leaving the poorer countries unrepresented or
silent. Given the Committees’ limited capacity to respond proactively, the discussions have not
proposed solutions to moved toward fostering initiatives and actions to consolidate the trade
concerns and market realities encompassed in policies addressing climate change.
Chapter 3 undertakes a practical study of climate change-related PPM measures by evaluating
three specific case studies of measures that have been implemented or have been proposed. Each
example is examined in the light of the different WTO norms likely to be engaged to determine
its consistency with the WTO. Underpinning these three illustrations are the discussions at the
TBTC and the CTE and potential DSB challenges.
The first case study touches on a US proposal, the Climate Protection Act of 2013, that suggests
implementing a carbon tax and border tax adjustment to reduce greenhouse gas emissions. While
this author acknowledges that US legislative history may suggest that the proposal has very few
chances of passing the embryonic draft stage, the analysis is relevant as it underlines the
questions relating to the consistency of a border tax adjustment related to carbon emissions. The
second case study examines the EU Renewable Energy Directive (RED) pertaining to biofuels.
This case study is particularly significant since Argentina launched a consultation process in
May 2013 on this directive. RED aims to attain the ambitious targets of 20% of energy overall
deriving from renewable sources by 2020. It provides two sustainability criteria with which
biofuel must comply in order to be eligible to count toward the target. The third case study posits
a hypothetical measure based on the French law on environment (Grenelle Law 2) initially aimed
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at imposing a mandatory labelling requirements on all products and services to inform
consumers of the carbon footprint and other related environmental indices.
Finally, Chapter 4 takes stock of the discussion in the previous chapters, especially Chapters 2 at
the committee levels and Chapter 3, and assesses the perspective of developing countries on
climate change-related PPMs. Climate change is a concern for both developed and developing
countries, but from different perspectives. In particular, with regard to the nexus of trade and
climate change, developing countries harbour suspicions about “green protectionism” of
developed countries. The use of PPM measures to mitigate climate change can cause restrictions
on market access of developing country products in developed countries and thus augment the
latter’s competitive edge. Procedural obstacles, such as higher compliance or certification costs,
combined with the multiplicity of standards are a particular source of concern for exporters from
developing countries. It is, however, argued that developing countries would benefit from
moving away from this perspective and work with developed countries to enhance their trade
capacity in relation to PPMs.
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A Topography of PPMs 2Recent technology and global trade have contributed to the proliferation of processes and
production methods (PPMs) and the attendant growing concerns of developing countries.
Charnovitz dates the link between PPMs and the environment back to 1906, when a US law was
passed banning the taking and gathering of sponges using diving apparatus from the waters of
Mexico or the Straits of Florida.2 In recent years, PPM measures have become more prominent
partly due to the fact that they address public policy concerns and that consumers have become
more mindful of the origin of products and “how they are made.” While consumers have always
made choices based on their preferences for certain products over others, choosing, for example
an automatic transmission rather than a stick-shift car, they have grown aware of global
commons concerns, such as labour conditions and climate change, and these carry increasing
weight in their purchasing decisions. Many consumers may nonetheless act out of pure self-
interest and ignore the public policy issues.
Policy concerns such as environment or labour conditions go beyond the mere appearance and
utility of goods and are attached to the processes whereby these goods are produced.3 In some
instances, the processes can have direct and tangible effects on health (the use of GMOs in
growing fruits or vegetables) or on ecosystems (for example fishing methods), while other
processes, such as those related to climate change, leave no discernible effects (for example,
flowers imported from Kenya versus flowers produced in a hothouse in Canada, where the
Canadian-grown flowers result in higher GHG emissions than those grown in Kenya due to the
need to artificially recreate the tropical climate conditions endogenous to Kenya).
2 Steve Charnovitz, “The Law of Environmental ‘PPMs’ in the WTO: Debunking the Myth of Illegality” (2002) 27:59 Yale J Int’l L 59 at 70 referring to An Act To Regulate the Landing, Delivery, Cure, and Sale of Sponges, c3442, 34 Stat. 313 (1906) (repealed 1914). The Act had an exception for sponges taken in deep water between October and May. 3 This paper focuses solely on PPMs related to goods, although this author recognizes that PPMs have also a significant impact on the supply and the suppliers of services. In his analysis of non-discrimination under GATS, Diebold addresses the issue of PPMs related to services and designates them as “service supply methods” (SSMs). See Nicolas F Diebold, Non-Discrimination in International Trade in Services. ‘Likeness’ in WTO/GATS (Cambridge: Cambridge University Press, 2010).
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The concept of PPMs refers to the manner in which a good or service is produced. While there is
no official definition of PPMs, 4 they are often categorized as: 1) product-related, for example the
minimum percentage of biofuel content of fuel,5 or 2) non-product-related (nprPPMs) or
“unincorporated” PPMs, for example cosmetic products not tested on animals.6 While product-
related PPMs affect “the functionality of the product” itself,7 that is its physical characteristics,
nprPPMs do not leave any trace in the product (for example, the invisible hands of child
labour).8 Regulations applying to PPMs may reflect broad underlying objectives such as the
environment, health, labour standards, or other social purposes, and although these regulations
do not concern the products per se,9 they have impacts at the production level. In its second
submission in US-Tuna III, Mexico described nprPPMs as:10
[u]nincorporated process and production methods (PPMs), which are also referred to as non-product related PPMs, leave no trace in the final product and are not reflected in the physical attributes of the product. The fishing methods at issue in this dispute are an example. They leave no trace in the tuna products nor are they reflected in the physical attributes of the tuna products.
The untraceability in the product increases the complexity of certification and verification.
4 See Christiane R Conrad, Processes and Production Methods (PPMs) in WTO Law: Interfacing Trade and Social Goal (Cambridge: Cambridge University Press, 2011) at 28 and Sebastian Puth, WTO und Umwelt—Die Produkt-Prozess-Doktrin (Berlin: Duncker & Humblot, 2003) at 44. 5 Tracey Epps & Andrew Green, Reconciling Trade and Climate: How the WTO Can Help Address Climate Change (Cheltenham: Edward Elgar, 2010) at 74. 6 Charnovitz considers the distinction between product-related and non-product related flawed because it relies on too simplistic distinctions. He suggests a useful taxonomy of PPMs: 1) how produced PPMs; 2) government policy PPMs; and 3) producer PPMs. See Charnovitz, supra note 2 at 67ff. On the latter category, see Donald Regan, “How to Think About PPMs (and Climate Change)” in Thomas Cottier, Olga Nartova & Sadeq Z Bigdeli, eds, International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge: Cambridge University Press, 2009) 97 at 102. 7 See Charnovitz, supra note 2 at 65-66. 8 For the purpose of this thesis, all reference to PPMs will mean origin-neutral nprPPMs unless otherwise indicated. 9 OECD, Processes and Production Methods (PPMs): Conceptual Framework and Considerations on Use of PPMs-Based Trade Measures, Doc No OECD/GD (97) 137. See contra Michael Trebilcock, Robert Howse & Antonia Eliason, The Regulation of International Trade (New York: Routledge, 2012) at 920 footnote 29 [Trebilcock et al, Regulation of Trade]. The authors contend that the report “claims that where the environmental damage is caused by the way in which the product is produced and not the product itself, the PPM is ‘non-product-related’. This analysis appears to be based on confused economic reasoning that non-product-related PPMs do not address consumption externalities.” See also Sanford E Gaines, “Processes and Production Methods: How to Produce Sound Policy for Environmental PPM-Based Trade Measures?” (2002) 27 Colum J Envtl L 383 at 388. 10 United States—Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products (Complaint by Mexico) (2011), WTO Doc WT/DS381/R at footnote 563 (Panel Report), online: WTO < http://docsonline. wto.org>.
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With regard to climate change, the complexity of PPMs is enhanced with a product life cycle,
which involves measurement of the impact on the environment at all stages of production
from the extraction of raw material to the use by the consumer and subsequent disposal. Life
cycle measurement is not uniform and several different methods are in use, thereby adding to
the opaqueness and difficulty of compliance.
2.1 The Traditional Debate…or what is left of a controversy
PPM-related issues and their controversial status under the WTO rules and case law have been
the subject of a cornucopia of literature.11 Debated is the issue of and the distinction between
product and process and, more specifically, between product-related and non-product related
PPMs. Climate change engages the problematic vis-à-vis nprPPMs: whether they are consistent
with the most-favoured-nation and national treatment provisions of the GATT (Articles I and
III),12 or are simply justified under the general exceptions (Article XX); and whether the TBT
Agreement applies. Underpinning these questions is the necessity of examining the design of the
measure to determine whether it is origin-neutral (but can lead to de facto discrimination) or
origin-based (de jure discrimination).
Under the national treatment principle (Article III of the GATT), foreign products must be
treated no less favourably than like domestic products, which first requires determining whether
11 Robert Howse & Donald Regan, “The Product/Process Distinction—An Illusory Basis for Disciplining ‘Unilateralism’ in Trade Policy” (2000) 11:2 EJIL 249 [Howse & Regan]; see also Regan, supra note 6; Arthur E Appleton, “Private climate change standards and labelling schemes under the WTO Agreement on Technical Barriers to Trade” in Thomas Cottier, Olga Nartova, & Sadeq Z Bigdeli, eds., International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge: Cambridge University Press, 2009) 131; Jason Pott, The Legality of PPMs under the GATT, (Geneva: International Institute for Sustainable Development, 2008); Gaines, supra note 9; Laurens Ankersmit, Jessica C Lawrence & Gareth Davies, “Diverging EU and WTO Perspectives on Extraterritorial Process Regulation” (2012) 21 Minn J Int’l L Online 14 at 19 [Ankersmit et al, “Extraterritorial”]; see Charnovitz, supra note 2; Peter Van den Bossche, Nico Schrijver & Gerrit Faber, Unilateral Measures Addressing Non-Trade Concerns. A study on WTO Consistency, Relevance of other International Agreements, Economic Effectiveness and Impact on Developing Countries of Measures concerning Non-Product-Related Processes and Production Methods (The Hague: the Ministry of Foreign Affairs of The Netherlands, 2007), online: University Maastricht <www.rechten.unimaas.nl>. 12 This thesis only focuses on the national treatment under the GATT and the TBT Agreement. For an analysis of PPM measures under the most-favoured-nation principle of the GATT, see Charles Benoît, “Picking Tariff Winners: Non-product related PPMs and DSB Interpretations of “Unconditionally within Article I:1” (2011) 42:2 Georgetown J Int’l L 605.
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products based on different PPMs can be considered like products. If found to contravene Article
III of the GATT either on de jure or de facto grounds, the question then is whether, as
discriminatory measures, they can be exempted under Article XX of the GATT. While until
recently there were ongoing doubts as to the application of PPMs, the recent WTO case law in
US-Clove Cigarettes13 and US-Tuna III seems to have offered, at least in part, somewhat more
clarity.
This controversy surrounding PPMs is more striking with respect to the TBT Agreement. For
some Member countries, the WTO is simply not the appropriate forum to address PPMs.
Australia, for instance, declared that “PPMs reflected the specific economic, social and
environmental conditions of individual countries, and, as such, were best dealt with at the
national level rather than in the WTO.”14 Incidentally, Australia’s position is of particular
interest since it is currently facing requests for consultation at the WTO by the Dominican
Republic, Ukraine, Honduras and Cuba for having implemented laws and regulations that impose
trademark restrictions and other plain-packaging requirements on tobacco products.15 The
sentiment against PPMs grows when they relate to climate change where some countries such as
Saudi Arabia have clearly indicated that these questions should not be dealt under the WTO’s
mandate.16
That a process leaves no visible trace or does not affect the end product does not exclude the
possibility that the process should in fact be considered as part of the product. In the climate
13 United States — Measures Affecting the Production and Sale of Clove Cigarettes (Complaint by Indonesia) (2012), WTO Doc WT/DS406/AB/T at para 117 (Appellate Body Report) [US-Clove Cigarettes]. 14 WTO, Special Session of the Committee on Trade and Environment, Summary Report on the Twenty-First Meeting of the Committee on Trade and Environment in Special Session (held on on 1-2 November 2007), TN/TE/R/21 at para 48, online: WTO <http://docsonline. wto.org>. 15 See Australia — Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (Request for Consultations by Honduras) (2012), WTO Doc WT/DS435/1; Australia — Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (Request for Consultations by Ukraine) (2012), WTO Doc WT/DS434, Australia — Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (Request for Consultations by Dominican Republic) (2012), WTO Doc WT/DS441; and Australia — Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging (Request for Consultations by Cuba) (2012), WTO Doc WT/DS458, online: WTO <http://docsonline. wto.org>. In addition to the WTO challenges, the Australian legislation on plain packaging is at the center of numerous investment challenges under the aegis of ICSID, for instance. 16 See infra Chapter 5 and WTO, Committee on Trade and Environment, Report of Meeting (held on 13 November 2012), WTO Doc WT/CTE/M/54, online: WTO <http://docsonline. wto.org>.
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change context, processes are as important as the product as they entail greenhouse gas (GHG)
emissions17 and other consequences harmful or not to the environment, such as over-irrigation.
Assessing completely the climate change impact of a product necessitates considering all its
elements and inputs, including the method by which it is produced, transported, distributed and
used, all of which contribute to emitting GHGs. In the context of climate change, nprPPMs
therefore raise the most controversy from a legal and development standpoint.
2.2 Three Features of PPMs
What distinguishes PPMs from other non-tariff measures is precisely that they regulate the
production process rather than the product itself. They translate internal policies externally and
can promote a change in production, either within the regulating state (thereby accomplishing the
public policy aim) or outside (as a response to a legitimate global concern). It is also because
PPMs stand on the fine line between encouraging and restricting economic activities that they
continue to raise concerns.
Like many non-tariff measures, PPMs have multiple objectives. They embody the balance
between the right to regulate and the need to address broader public policy concerns that may
have an impact on trade. They also represent economic rationales driving states to regulate and
consumers to prefer some products rather than others, thereby influencing supply and demand.
They may signal to the rest of the world that beyond economic purposes there are legitimate
objectives such as climate change that prevail and thus shape the actions and regulations of both
a state and consumers at home and outside national borders. They may also be useful to protect
domestic production from competition with foreign products or to maintain the effectiveness of
regulation. These interconnected features illustrate the mosaic of underlying concerns that PPMs
continue to inspire.
17 Greenhouse gases include, inter alia, carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs) perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).
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As Baldwin notes:18 [T]he mere fact that standards and regulations inhibit trade and competition is by no means an argument for their removal. Good governance requires regulation to protect the health, safety and wellbeing of citizens, animals and plants as well as to facilitate market transactions. The main problem with [technical barriers to trade] liberalisation is that it is difficult to know whether a particular norm serves the public interests or protectionists’ interests and indeed, both motives are often combined in a single [technical barrier to trade].
This section will discuss three underpinning features of PPM measures: 1) their economic
feature; 2) their public policy objectives; and 3) their extraterritoriality. None of the three
elements is a unique attribute of PPMs since in any non-tariff measures share these features, but
they are emphasized specifically in PPMs and play a crucial role in the climate change context.
2.2.1 Economic Concerns
It is often contended that PPMs serve as a disguised trade barrier or protectionism. Any trade or
non-trade measure can be an instrument of protectionism and any trade measure (or tax) applying
to products can serve protectionist goals.19 PPMs may however be more susceptible to
protectionist manipulation “because they are so directly linked to important, but indirect, aspects
of production cost, such as labour and environmental standards.”20
PPMs are generally perceived as impeding or distorting competitive advantage and therefore
increasing the “unlevel” playing field by imposing additional burdens on foreign producers in
order to favour domestic competitors. Howse & Regan argue, a contrario, that PPMs do not
necessarily create any comparative disadvantage for foreigners nor do they coerce states, albeit
they may motivate some states to align themselves with the same regulatory purpose. 21 Whether
countries perceive PPMs as coercive or as incentives to achieve higher standards and adjust their
regulations permitting them to gain a first-mover advantage will depend on their ability to absorb
18 Richard Baldwin, “Regulatory Protectionism, Developing Countries and a Two-Tier World Trade System”, (2000) Center for Economic Policy Research, Discussion Paper no 2574 at 3. 19 See Howse & Regan, supra note 11. The authors argue that claiming that PPMs are perceived as disruptors of competitive advantage and coercive elements of trade is misleading. See also Regan 2010, supra note 7; Pott, supra note 11 at 5. 20 Ankersmit et al, “Extraterritoriality”, supra note note 11 at 31. 21 See Howse & Regan, supra note 11 at 277, 280 and Regan, supra note 6.
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the costs of these changes, which in turn is related to their market size and the size of the
importing market. 22
Regulating processes and production methods inadvertently affects production costs in other
countries given the wide spread and nature of supply chains. Producers may incur additional
production costs, but they may also benefit from more cost-effectiveness in the long term, which
can propel them into new markets. PPM measures are not instruments that block market access;
they regulate and restrict it, which may result in an importing country losing or gaining market
access. Small producers (e.g. SMEs) or small countries will evidently be affected more seriously
by such measures than multinational corporations or exporting countries that can provide
subsidies or other forms of assistance to help its industries adapt to the changes in demand.
Faced with an increase in production costs, producers may opt out of a market and turn to other
countries with more relaxed regulations. In climate change parlance, this phenomenon refers to
carbon leakage.
PPMs can also be used to “shield domestic producers and workers from import competition.” 23
Domestic industries integrate PPM measures at lesser cost because they benefit from obtaining
the information in advance and they have more knowledge of the market. Often as important
players at home, they may have supported a government’s decision to implement a certain PPM
measure to favour local production. Protection against foreign producers can however
disincentivize domestic producers to develop and innovate in their field. In the long term this
would deter competitive stimuli and create market stagnation, with consumers eventually losing
and becoming captive to a stagnating market.
The claims set out above echo the criticism that many developing countries voice over PPMs as
trade protectionist tools and disguised barriers to trade implemented more often than not by rich
countries.24 According to their view, PPMs impose a heavier burden (administrative,
technological and financial) on the exporting firms of developing countries, who must incur
these related costs to comply with the PPM measures required in order to preserve their market
access to importing countries. Developing countries may not have the resources to adapt their
22 Howse & Regan, ibid, see also Ankersmit et al, “Extraterritoriality”, supra note note 11 at 25. 23 See Charnovitz, supra note 2 at 62. 24 See infra Chapter 5.
12
processes or infrastructures to more advanced technology. In addition, they may not share the
same non-trade-related objectives as developed countries. It may not be in the interest of their
internal growth to adopt processes that do not reflect their own public policy concerns. Consider
a developing country that would have to change its production methods for an entire sector to be
compatible with a U.S. public policy measure aimed at addressing health and obesity concerns.
This may not necessarily be aligned with the exporting country’s (and region’s) own public
policy on health and might limit the developing country’s access to other markets.
An example of the burdensome economic impact a PPM measure could have is evidenced in a
report on large-scale production of biofuel and its sustainability published by the government of
the Netherlands. A committee was and issued report in 2007 (“Cramer Report”) that set forth
criteria geared to integrate sustainable policies in the production of biofuel.25 From a purely
environmental and sustainable development perspective, the proposed criteria were considered
sound and innovative although they would necessitate considerable changes in the production
methods of biofuel to ensure sustainability. For example, “in the application of biomass a net
emission reduction of greenhouse gases must take place along the whole chain.”26 Such a
criterion may prove challenging to put in place since supply chains are integrated globally27 and
create traceability difficulties. Following the Cramer Report, a group of experts evaluated the
criteria proposed in the report and their implementation consequences on trade. They
demonstrated the trade and economic impacts the implementation of the sustainability and
climate change PPMs would have:28
In a study of the impacts of sustainability criteria on bioethanol production in Brazil and the Ukraine, Smeets et al. (2006) estimated that total production costs would increase by between 35 and 88 per cent. […] For ethanol produced in the São Paulo region (where 60 per cent of Brazilian sugar and ethanol are produced), they estimated that total production costs would rise by 24–56 per cent, increasing the cost per litre by € 0.12.
25 Energy Transition’s Interdepartmental Programme Management, Testing Framework for sustainable biomass. Final report from the project group “Sustainable production of biomass”, chaired by Professor Jacqueline Cramer, 2007. 26 Simoneta Zarrilli, Making Certification Work for Sustainable Development: The Case of Biofuels, UN Doc UNCTAD/DITC/TED/2008/1 at 2. 27 James Bacchus, “Common Gauge: Harmonization and International Law”, Clough Center for the Study of Constitutional Democracy (16 April 2013). 28 Van den Bosche, supra note 11 at 223 referring to a study by E Smeets, A Faaij and I Lewandowski, The Impact of Sustainability Criteria on the Costs and Potentials of Bioenergy Production, Report no. NWS-E-2005-6 (Utrecht: NOVEM, 2005), at 74-78.
13
With such high estimated cost increases, developing countries producing biofuel would likely
perceive this sustainable regulatory initiative as protectionism or a trade barrier. The initiative
would encourage them to divert their trade to countries with less stringent criteria or no criteria at
all.29
Furthermore, the increase in climate change PPM measures in the form of regulatory measures
(such as biofuel sustainability criteria), ecolabelling or carbon footprint have complicated the
compliance landscape by creating a “regulatory heterogeneity.”30 This regulatory heterogeneity
multiplies the compliance standards and certification requirements resulting in increased costs
for exporting countries. At the same time, it signals the regional differences in policies and
consumer concerns that countries elect to put in place.31
The discussion above framed the economic critiques related to PPMs. The other side of the coin
reveals the importance of PPM measures to improve social and economic welfare through
correcting market failures.32 PPMs can hence serve as tools to reduce consumption externalities
or improve the efficiency outcomes of the global market.33
The differences in production and in regulatory implementation can become ground for building
economic benefits. Public policy conveyed throughout PPMs can be used to incentivize countries
to upgrade production methods.34 They can also contribute to fostering competitiveness between
domestic industries and foreign competitors. In the climate change sector, companies focus on
promoting innovation to develop and market cleaner technologies that reduce GHG emissions.
Through the increase of these innovative technologies, companies change production methods to
optimize and attain cleaner results in the process output. Such economic dynamism can help
secure a greater market share and become a recognized branding for a company in some sectors.
29 Essaji used the Cramer Report in his econometric analysis as an example demonstrating that higher standards in an importing country reduce the exporting country’s sales. Azim Essaji, “Trade Liberalization, Standards and Protection”, (2010) 10 BE Journal of Economic Analysis & Policy at 6. 30 Alan O Sykes, “Regulatory Protectionism and the Law of International Trade” (1999) 66:1 U Chicago L Rev 1. 31 Ibid at 51. 32 Michael J Trebilcock & Robert Howse, The Regulation of International Trade, 2d ed (London: Routledge, 2001). 33 Pott, supra note 11 at 6. 34 Ibid.
14
The protection of domestic industries may not be the primary motivation underlying the
implementation of PPM measures. Instead, a country may signal a “growing awareness of the
externality, a higher weight placed on externality reduction, and the growing effectiveness of
standards in mitigating externalities.”35 However, electorally accountable politicians are likely to
weigh policy options in light of their re-election and to favour implementing measures to protect
a domestic sector. 36 As Sturm indicates, “the uncertainty about the optimal level of the standard
allows the politician to disguise his transfer, which in turn reduces the electoral penalty for his
policy choice.”37
2.2.2 Non-Economic Policy Concerns
PPMs can also be governmental tools to promote non-economic purposes38 as a response to
public policy concerns, such as health and the environment, and even more so they can advance
legitimate environmental policy objectives,39 which may correspond to the “dominant purpose”
of PPMs rather than the economic motivation.40 Despite the core common policy objective,
climate change policies reflect some underlying discrimination against products that have higher
levels of GHG emissions as these policies attempt to promote a market that favours products and
processes with beneficial consequences for the environment.41
Some countries and regions, like the European Union (EU), have adopted a strong political
stance as a response to public concerns. Public policies can either be influenced by consumers’
preference or they can shape them, down-streaming information to consumers. The EU’s seal
product ban reflects the former account of public policy whereas the biofuel directive is a
governmental intervention to bolster consumer behaviour in a specific way. Consumers’
35 See Essaji, supra note 29 at 16. 36 Daniel M Sturm, “Product standards, trade disputes, and protectionism” (2006) 39:2 Can J of Econ 564. 37 Ibid at 566. 38 On this issue, see Howse & Regan, supra note 11; see also Nicolas F Diebold, “Non-discrimination and the Pillars of International Economic Law”, (2010) Institute for Law and Justice, Emerging Scholars Paper, Paper 18; and Ankersmit et al, “Extraterritoriality”, supra note 11. 39 See Charnovitz, supra note 1 at 61. 40 See Howse & Regan, supra note 11 at 280. 41 See Carolyn Fisher & Alan K Fox, Comparing Policies to Combat Emissions Leakage – Border Tax Adjustments versus Rebates, 2009 Ressources for the Future.
15
preference for a process may translate into a conviction by which they seek to encourage a
specific process and discourage another. By purchasing dolphin-friendly tuna, consumers may
convey a message that dolphin-unfriendly tuna does not reflect their moral principles.
Rather than lamenting the negative effects of PPMs, it is argued that states should use them as an
opportunity to embed the WTO more deeply in wider international law norms.42 According to
this view, countries would be well advised to work together to implement PPM measures that are
beneficial for the common good while at the same time fostering trade liberalization, as opposed
to viewing PPMs solely in terms of protectionism with which they are often associated. One
purpose need not exclude the other.
2.2.3 Extraterritorial element
In general it is understood that extraterritorial measures directly apply to a conduct in another
country, in contrast to domestic measures regulating the entry of imported goods or services into
a national market.43 One of the most sensitive features of PPMs is their extraterritorial reach
because it overlaps with the right of a sovereign nation to regulate. Without providing an in-
depth analysis of the complex issues of extraterritoriality related to trade measures,44 this section
underlines the issues raised by extraterritoriality in the relationship between PPMs and climate
change, given the global nature of climate change and the concerns involved.
The extraterritorial effect of PPM measures has been considered as contrary to the preservation
of national sovereignty.45 Indeed, PPMs can impact economic activity across borders by acting
as market-based incentives to adopt new production ways.46
42 See Ankersmit et al, “Extraterritoriality”, supra note 11 at 21 referring to Joost Pauwelyn, “The Role of Public International Law in the WTO. How Far Can We Go?” (1995) 95 Am J Int’l L 535. 43 Erich Vranes, Trade and Environment – Fundamental Issues in International Law, WTO Law, and Legal Theory (Oxford: Oxford University Press, 2009) at 320ff [Vranes, Environment]. 44 Ibid. 45 John H Jackson, “The WTO Constitution and Proposed Reforms: Seven ‘Mantras’ Revisited” (2001) 4 JIEL 67 at 72. 46 Pott, supra note 11 at 29.
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Not complying with PPM measures results in the temporary or permanent loss of market access
and thus of income. In other words, PPMs only have an indirect impact on the conduct of other
countries since the conduct of producing products is not directly being regulated – Vranes frames
this as “merely indirect extraterritorial effects.”47 They do not limit the conduct of another
country but they may restrain market access48 if the exporting country decides not to comply
with the measures. In that light, “[f]oreign producers can use whatever processes they want, and
use them with impunity. The only thing they cannot do is bring products produced with certain
processes into the [regulating] country.”49 This indirect extraterritorial effect can however be
coercive when the lost market represents a large one50 or the only market available.
This speaks to one of the most significant concerns of developing countries: it may well be that
PPM measures only have an indirect extraterritorial impact, but these measures nonetheless
impose a process method as a condition for market entry or sale, thus requiring a country to
change and adapt its methods or be removed from the market. From a climate change and
environmental perspective, this may be considered a positive impact in that it would require
changes for improved clean energy processes.
As seen above, the objective of PPM measures may not always be to regulate extraterritorial
behaviour. Rather, a country may decide to regulate based on domestic policy because it wishes
not to promote what is considered a frowned-upon product or method (for example, the EU and
asbestos, the US and dolphin-safe labelling measures, or the neutral packaging of cigarettes and
alcohol).
Climate change is an inherently extraterritorial issue while it also relates to state sovereignty and
thus raises the question of the right to regulate.51 Climate change PPM measures concern
domestic behaviour as well as behaviour in other jurisdictions because the global nature of
climate change cannot be confined within the borders of one territory. When a country
47 Vranes, Environment, supra note 43. 48 Pott, supra note 11 at 5-6. 49 Howse & Regan supra note 13 at 274; the authors consider trade measures as territorial. 50 Ankersmit et al, “Extraterritoriality”, supra note 11 at 25. 51 Eric Dannenmaier, “Constructing Transnational Climate Change Regimes” in Günther Handl, Joachim Zekoll & Peer Zumbansen eds, Beyond Territoriality: Translational Legal Authority In an Age of Globalization (The Hague: Brill, 2012).
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implements such PPMs it can “claim to be acting in its own interest and the interest of its
citizens”52 as well as in the common good.
GHG emissions are reflected in both production and consumption externalities, the former
occurring more often than not outside the regulating market and the latter within the regulating
market. Being both inwardly and outwardly directed,53 PPMs create efficient responses to
internalize these externalities. They must reach out to both the demand and the supply sides and
“be targeted as close to the externality as possible”.54 Helm argues however that consumption
comprises the most important cause of pollution and measures should not focus on where the
pollution originates but rather where it ends up.55
In sum, the topography outlined in this chapter contextualized PPMs in their well-known
controversies. PPMs are crucial to climate change policies because they can regulate GHG
emissions at the two extremities of a product life cycle that are most responsible for GHG
emissions: production and consumption. It has been maintained that the three fundamental
components of PPMs, namely their economic purpose, their public policy objectives and their
extraterritorial nature, embody the interconnectedness of the trade and climate change issues.
The discussion in this section has set the groundwork for a more comprehensive discussion in the
following sections of the legitimacy of PPMs at the legal and institutional levels. The next
chapter will present an overview of the debate within the WTO.
52 Ankersmit et al, “Extraterritoriality”, supra note 11 at 26. 53 Charnovitz, supra note 2. 54 Dieter Helm, The Carbon Crunch: How We're Getting Climate Change Wrong--and How to Fix It (New Haven: Yale University Press, 2012) at 189. 55 Ibid at 189-191.
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PPMS under the WTO Institutions 3
The WTO legal corpus is silent on the legality or illegality of PPMs, although the TBT and SPS
Agreements expressly refer to “processes and production methods.” Following the unadopted
GATT Panel reports pertaining to US tuna import restrictions,56 PPMs became the subject of
much controversy among the trade community and many WTO Members have since then
maintained the position that they are not covered by GATT rules. This (mis)interpretation has
since then been following PPMs. No WTO tribunal has been asked so far to evaluate the
compliance of climate change measures, let alone those that would involve PPMs, such as border
tax adjustments (BTAs) or regulatory measures. With the increasing recourse to unilateral
climate change measures, this day may come sooner rather than later. In the light of this eminent
possibility and the recent consultation request of Argentina, this chapter will examine the GATT
and TBT rules that would be grounds for a challenge.
3.1 WTO Rules
This first section will outline the GATT legal framework under which climate change related
PPMs would probably be seen as contentious: 1) the national treatment obligations under
Articles III:2 and III:4 of the GATT and by extension Article II:2(a). At the outset, it is
maintained that PPMs are not excluded from the GATT and that neither the WTO provisions nor
the case law have expressly rejected PPMs as part of the analysis of the elements of national
treatment.57 A second section will examine three approaches to including PPMs in the analysis
of likeness. The third section will centre on 2) the general exceptions under Article XX; and 3)
the TBT Agreement in particular Articles 1, 2.1 and 2.2.
56 These two early GATT reports refer to a US legisation on the harvesting of tuna and are considered the first decisions on PPMs. GATT, Dispute Settlement Panel Report on United States Restrictions on Imports of Tuna, (1991) 30 ILM. 1594; GATT, Dispute Settlement Panel Report on United States Restrictions on Imports of Tuna, (1994) 33 ILM. 839. 57 Robert Howse, “World Trade Law and Renewable Energy: the Case of Non-tariff Measures” (2006) 6 JEPPL 500 at 504.
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3.1.1 Non-discrimination under National Treatment
The core of non-discrimination norms is embodied by the obligations of most-favoured nation
(MFN) and national treatment, Articles I and III of the GATT, respectively. The MFN principle
provides for treatment no less favourable for all Members whereas the national treatment applies
between imported and domestic products by ensuring that imported products are not
discriminated against in favour of domestic products. The main purpose of Article III is to avoid
protectionism as regards the application of internal taxes (III:2) and regulatory measures
(III:4).58
The national treatment principle implies an evaluation of different elements: whether imported
and domestic products are like products, or directly competitive or substitutable, and whether
imported products are treated less favourably than domestic products. Essentially, with regard to
PPMs, the question becomes whether PPMs can be the basis for determining a relationship of
likeness or directly competitive or substitutable.
The “likeness” threshold and the less favourable treatment determination are crucial to assessing
the existence or absence of discriminatory treatment. Likeness raises numerous complexities as
to the analysis of PPMs; for example, for aluminum produced with hydroelectricity, aluminum
produced with coal, and aluminum produced with coal and 30% renewable energy: is the
aluminum a like product? Is it directly competitive or substitutable? Is the imported aluminum
being treated less favourably than the domestic aluminum? Domestic regulations related to
climate change may also prove difficult to examine under the less favourable treatment.59
This section will first examine how the WTO dispute settlement bodies (DSB) have dealt with
the principle of national treatment under III:2 and III:4. Next, drawing from Diebold’s suggested
approaches, it will propose three accounts for PPMs, namely i) an objective approach based on
the four criteria set out in the Report of the Working Party on the Border Tax Adjustment,60 ii) a
58 Appellate Body Report, Japan – Taxes on Alcoholic Beverages (Complaint by European Commission et al) (1996), WTO Doc WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R at para 16, online: WTO <http://docsonline.wto.org> [Japan – Alcoholic Beverages]. 59 Patrick Low, Gabrielle Marceau & Julia Reinaud, “The Interface Between The Trade And Climate Change Regimes: Scoping The Issues” (2011) World Trade Organization (Economic Research and Statistics Division), Staff Working Paper ERSD-2011-1 at 493. 60 GATT, Report of the Working Party on Border Tax Adjustment, GATT Doc 18 Supp BISD (1970) 102 at para 18
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contextual approach putting in the fore front the regulatory purpose of a measure, and iii) an
economic approach. It is argued that including PPMs in the traditional criteria would present the
most direct and non-obscure way to consider PPMs as a basis in the likeness analysis, but it is
unclear whether a DSB will show that level of flexibility. The economic approach may prove to
be too limited because it would not take into account the production and consumption
externalities connected to PPMs. The more suitable approach for PPMs would then be the
contextual approach relying on the regulatory purpose of a measure.
The likeness analysis is based on the market-based analysis, which centres of the importance of
how consumers perceive PPM, and which calls for both the objective and contextual approaches.
Once likeness has been determined, the DSB must turn its attention to less favourable treatment.
The recent decisions under the TBT Agreement suggest that detrimental effects on an imported
product may be not less favourable if other factors than the origin of the product can explain it.61
This rationale leaves some flexibility with regard to PPMs and their regulatory purpose to be
considered in the analysis.
3.1.1.1 Tax Measures
Article III:1 sets out the general principle of national treatment and informs the obligations found
under Articles III:2 and III:4.62 It posits that no measure should afford protection to domestic
products to the detriment of imported products.
Article III:2 is divided into two sets of obligations. The first sentence reads as follow:
The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products.
[Report of the Working Party]. 61 US-Clove Cigarettes at para 174; United States – Measures Concerning the Importation, Marketing and Sale of Tuna Products (Complaint by Mexico) (2012), WTO Doc WT/DS381/AB/R at para 215 (Appellate Body Report), online: WTO <http://docsonline.wto.org> [US-Tuna III]; United States – Certain Country of Origin Labelling (COOL) Requirements (Complaint by Canada and Mexico) (2012), WTO Doc WT/DS/384/AB/R, WT/DS/386/AB/R (Appellate Body Report) online: WTO <http://docsonline.wto.org> [US-COOL] [collectively, the Trilogy]. 62 EC-Asbestos at para 98.
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The second sentence of Article III:2 must be read together with Ad Article III:
Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.
Ad Article III:
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.
The first sentence predicates an obligation relying exclusively on the standard of likeness or of
“perfect substitutability”63 implying the highest degree of likeness to be construed narrowly.64
To determine likeness, the WTO DSB have essentially relied on the criteria established in the
Report on Border Tax Adjustment: product characteristics, end-uses, consumer tastes and habits,
and tariff classification, where common end-use and physical characteristics prevail.65
Once likeness has been determined, the test turns to evaluating whether the imported products
are taxed in excess of the domestic products. Given that the first sentence is based on a high
degree of likeness, any differences of taxation, even a de minimis excess will be considered too
much and incompatible with Article III:2.66 As Epps and Green point out, a narrow interpretation
of likeness grants importing countries more flexibility in implementing climate change taxes
since it increases the chances of finding products unlike if the taxes differ between the domestic
and imported products.67 Once found unlike, a tax measure gains the policy space to impose
fewer constraints in designing climate change taxes.68 In other words, if aluminum produced by
63 Diebold, supra note 3 at 107. See also Korea – Alcoholic Beverages (Complaint by the European Communities and Unites States) (1999),WTO Doc WT/DS75, 84/AB/R, (Appellate Body Report) at para 118, online: WTO <http://docsonline.wto.org> [Korea-Alcoholic Beverages]. 64 Japan-Alcoholic Beverages at para 112-113 and Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes (Complaint by Honduras) (2005), WTO Doc WT/DS302/R at para 7.330-331 (Panel Report), online: WTO <http://docsonline.wto.org> [DR-Cigarettes]; European Communities – Measures Affecting Asbestos and Asbestos-containing Products (Complaint by Canada) (2001) WTO Doc.WT/DS135/AB/R at para 95 (Appellate Body Report) [EC-Asbestos]. 65 Panel Report, Japan-Alcoholic Beverages at para 6.22. 66 Japan Alcoholic-Beverages at p 23 section H(1)(b). 67 Epps and Green, supra note 5 at 96. 68 Ibid.
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solar energy and coal were considered unlike, a government could impose a different tax regime
on the two products without there being any inconsistency with the first sentence.
If products do not meet the strict analysis of the first sentence, they undergo an examination
under the second sentence. The emphasis is then put on a “direct competitive or substitutable”
relationship between the imported and domestic products, implying a broader analytical scope
than the required narrow construction under the first sentence. The analysis calls for the
examination of three elements: whether the imported and domestic products are directly
competitive or substitutable; whether these products are not similarly taxed; and whether the
internal tax is applied so as to afford protection to domestic production.
The physical characteristics hinge on the assessment of [the degree of] substitutability: the more
physical characteristics domestic and imported products share, the greater their substitutability.69
The relationship between the two sentences is not bidirectional: like products are necessarily
directly competitive or substitutable, yet being in direct competition or substitutable does not
make products like.70 To illustrate, ethanol and oil can be substituted for the purpose of transport
fuel yet, arguably, they are not like products since they do not have the same physical
characteristics: they are not sourced from the same raw materials and the negative externalities of
one (pollution) are far greater than the other, etc.
Determining the existence of a direct competitive or substitutable relationship requires an
analysis based on the traditional four criteria with more focus on the consumer’s preference or an
assessment of the cross-price elasticity of demand in a dynamic market place.71 In Korea-
Alcoholic Beverages, the Appellate Body (AB) posited that the cross-price elasticity was not the
decisive criterion and that the relationship must be found in a dynamic market.72 In addition, an
internal tax should not afford protection to domestic products and as such, the determination
69 See Diebold, supra note 3 at 107. 70 See Won-Mong Choi, “Like Products” in International Trade Law: Toward a Consistent GATT/WTO Jurisprudence (Oxford: Oxford University Press, 2003) at 18 and Korea-Alcoholic Beverages at para 118. 71 See Choi who argues that competitive relationship is based on both demand substitutability and supply subsititutability. Ibid. See also Michael J Trebilcock and Shiva K Giri, “The National Treatment Principle in International Trade Law” (2004) 8 Am L & Econ Association Annual Meetings 1. Henrik Horn and Petros C Mavroidis, “To B(TA) or Not To B(TA)? On the Legality and Desirability of Border Tax Adjustment from a Trade Perspective” (2011) 34:11 World Economy 1911 at 1915. The authors point out that these two analytical lenses were considered equal in the Korea-Alcoholic Beverables case. 72 Korea-Alcoholic Beverages at paras 114-119.
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thereof must consider the design, architecture, and structure of the challenged tax.73 This is not a
question of intent but rather of the application of the measure. The reference to Article III:1
incorporated the overarching principle of non-protectionism (“so as to not afford protectionism”)
in the assessment of treatment.
In the recent Canada-FIT Programm, a Canadian measure under the Ontario feed-in-tariff
programme was challenged by Japan and the EU. The measure aimed at encouraging production
of renewable energy (wind and solar) by imposing a local content provision. Examining the
likeness issue under Article III:8 of the GATT, which provides for a derogation of the national
treatment principle for government procurements, the AB concluded that the local content
requirement did not fall within the scope of Article III:8.74 The AB also noted that process is part
of the competitive relationship analysis:75 The coverage of Article III:8 extends not only to products that are identical to the product that is purchased, but also to "like" products. In accordance with the Ad Note to Article III:2, it also extends to products that are directly competitive to or substitutable with the product purchased under the challenged measure. For convenience, this range of products can be described as products that are in a competitive relationship. What constitutes a competitive relationship between products may require consideration of inputs and processes of production used to produce the product.
While this statement integrates production methods within the components of the competitive
conditions, the AB side-stepped further specifying whether it was to be considered in the
consumer’s preference or as part of the characteristics of the products. This decision adds
ambiguity surrounding PPMs and how they will subsequently be considered by future DSB.76
3.1.1.2 A Specific Eye on BTAs
The discussion on taxation measures above segues into an examination of the important concept
for climate change of border tax adjustments (BTAs). If BTAs are considered “customs duties”
or charges imposed on or in connection with importation, they fall within Article II. Otherwise,
73 Japan-Alcoholic Beverages at pp 29-32; see also Korea-Alcoholic Beverages at para148. 74 Canada-Certain Measures Affecting the Renewable Energy Generation Sector/Canada-Measures Relating to the Feed-in-Tariff Programm (Complaint by Japan and the EU) (2013), WTO Doc WT/DS412/AB/R, WT/DS426/AB/R at para 5.63 (Appellate Body Report) [Canada-FIT Programm], online: WTO <http://docsonline.wto.org>. 75 Ibid. 76 See Maureen Irish, “Renewable Energy and Trade: Interpreting Against Fragmentation” [draft – not published].
24
they are subject to the analysis under Article III:2. The issue of BTAs is of particular importance
for the climate change context, as will be further expounded in Chapter 3, because they attempt
to respond to harm caused by loss of competitiveness and carbon leakage. Common for food and
“regular” consumption products, BTAs have not yet been implemented as regard to climate
change leading to an abundance of writing in scholarly and trade circles speculating on and
discussing BTAs in that specific context.77
Article II of the GATT provides that only tariffs should be imposed by an importing country at
its border. Article II:1(b) prohibits duties and charges in excess of those found in the tariff
schedules of the GATT. However, Article II:2(a) permits taxes to be adjusted at the border: “a
charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of
Article III in respect of the like domestic product or in respect of an article from which the
imported product has been manufactured or produced in a whole or in part.”
In China-Auto Parts, the AB clarified the distinction between duties and internal taxes. It held
that duties on imports are considered internal taxes or charges when the obligation to pay them is
caused by an internal factor, “something that takes place within the customs territory.”78 If a
BTA on GHG emissions was caused by the sale or distribution of the imported market, BTAs
may then be considered an internal tax or charge.
The complexities of BTAs arise in relation to whether a charge can be imposed on GHG
emissions considering that the emissions occur outside the importing country at the production
site. Put differently, can a BTA be applied to PPMs? Generally BTAs are used to offset taxes
charged on products when domestic products are also taxed similarly. A distinction is drawn
between indirect taxes - such as sales tax or value-added taxes on products - and direct taxes –
taxes on income or profits - where the latter is not adjustable and the former is. There remains
some uncertainty as to whether indirect taxes that relate to processes can be adjusted.
The OECD definition of BTA was integrated in the Report of the Working Party:
77 See infra Chapter 4, Section 4.1. 78 China - Measures Affecting Imports of Automobile Parts (Complaint by Canada) (2009), WTO Doc WT/DS339,340,342/AB/R at para 161 (Appellate Body Report) [China-Auto Parts].
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any fiscal measures which put into effect, in whole or in part, the destination principle (i.e. which enable exported products to be relieved of some or all of the tax charged in the exporting country in respect of similar domestic products sold to consumers on the home market and which enable imported products sold to consumers to be charged with some or all of the tax charged in the importing country in respect of similar domestic products).
Howse and Eliason argue that this definition does not draw a distinction between product and
production but simply frames the matter within the broad non-discrimination principle under
Article III:2.79 The Report of the Working Party left some ambiguity with respect to hidden taxes
(taxes occultes) such as those on energy by not expressly including nor excluding them. Hidden
taxes specifically relate to PPMs as unincorporated in the product.80 In the US-Superfund case,
the Panel held as non-discriminatory a US tax measure applicable on imported products based on
chemicals used in the process:81 the tax adjustment rules of the General Agreement distinguish between taxes on products and taxes not directly levied on products; they do not distinguish between taxes with different policy purposes. Whether a sales tax is levied on a product for general revenue purposes or to encourage the rational use of environmental resources, is therefore not relevant for the determination of the eligibility of a tax for border tax adjustment. For these reasons the Panel concluded that the tax on certain chemicals, being a tax directly imposed on products, was eligible for border tax adjustment independent of the purpose it served.
Arguably, a tax based on GHG emissions ultimately imposed on the product would be
considered adjustable. For Howse, the US-Superfund opens the door to BTAs on inputs related to
production.82
In addition, the footnote 61 of the Subsidies and Countervailing Measure Agreement helps
illuminate the matter as it allows adjustment on energy exports. It expressly stipulates that inputs
79 Robert Howse & Antonia Eliason “Domestic and International Strategies to Address Climate Change: An Overview of the WTO Legal Issue” in Thomas Cottier, Olga Nartova & Sadeq F Bigdeli, eds, International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge: Cambridge University Press, 2009) 61 at 64-65. 80 Richard Tarasofsky, “Heating Up International Trade Law: Challenges and Opportunities Posed by Efforts to Combat Climate Change” (2008) 1:7 CCLR at 11. See also Joost Pauwelyn, “Carbon Leakage Measures and Border Tax Adjustments under WTO Law” (2012) in D Prevost and G Van Calster eds, Research Handbook on Environment, Health and the WTO (Cheltenham: Edward Elgar, 2012) at 27ff; online: SSRN <http://ssrn.com> [Pauwelyn, “BTA”]; and Paul-Erik Veel, “Carbon Tariffs and the WTO: An Evaluation of Feasible Policies” (2009) 12:3 JIEL 749 at 772. 81 United States – Taxes on Petroleum and Certain Imported Substances (Complaint by Canada, European Communities and Mexico) (1987), GATT Doc L/6175, 34th Supp BISD [US-Superfund]. 82 See Howse, “NTM”, supra note 57 at 503. Tarasofsky notes that the case is in fact not on nprPPM because the chemicals leave a trace in the product, see Tarasofsky, supra note 80.
26
are “physically incorporated, energy, fuels and oil used in the production process and catalysts
which are consumed in the course of their use to obtain the exported product.” As such Howse
and Eliason argue that the focus is on the production of the product rather than whether
production is incorporated in the product.83
Pauwelyn suggests that BTAs on imports would be consistent with WTO rules as long as they do
not discriminate based on origin.84 Since the goal of a carbon BTA is to internalize the “social
cost of carbon in the ultimate price of products”, the price of the targeted product increases
which affects the competitive conditions. He characterizes these as taxes “indirectly” on
products, which makes them adjustable at the border.85 The existence of a nexus between the tax
and the product would enable a carbon tax to be adjusted under WTO rules.86 However, since no
DSB has yet examined this question in an actual setting and given that the findings are highly
dependent on the facts of the case, the eligibility of a BTA on process remains unresolved.
3.1.2 Regulatory Measures
According to Article III:4 of the GATT, no imported goods should be treated less favourably
than domestic like products in “respect of all laws, regulations and requirements affecting their
internal sale, offering for sale, purchase, transportation, distribution or use.” The language of
Article III:4 has a wide breadth in scope of the obligation: extending to any measure other than
those tax measures specifically falling under the ambit of Article III:2.
The overarching principle of non-protectionism set out in Article III guides the interpretation of
Article III:4. A two-pronged test is attached to the determination of a violation of this article.
This first consists in assessing whether the imported and domestic products at issue are “like
products”; and the second whether the group of imported like products are accorded less
favourable treatment than that accorded to the group of like domestic products.87
83 Howse & Eliason, supra note 79 at 65-66. 84 Pauwelyn, “BTA”, supra note 80. 85 Ibid at 28-29. 86 Ibid at 27-28. 87 EC-Asbestos at 84-141. It should be noted that in Korea-Beef, the AB considered a 3-step analysis, see Korea –
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Fundamentally, whether products are like hinges on their competitive relationship in the market.
Like products will be examined under the four criteria, namely: product characteristics, end uses,
consumers’ behaviour and tariff classification, and will also consider all relevant factors that may
affect the likeness of products, such as health risks which the AB in EC-Asbestos considered.88
Some authors have contended that including the health risks has not necessarily incorporated an
element of regulatory purpose in the likeness standard whereas others have opined that it opened
the door for it.89 Ultimately, like products are determined through the market-based approach.90
Adding to the ambiguity of the interpretation, the AB in US-Clove Cigarettes stated that
“regulatory concerns and considerations may play a role in applying certain of the ‘likeness’
criteria (that is, physical characteristics and consumer preferences) and thus, in the determination
of likeness under Article III:4.”91 Accordingly, the regulatory distinction would only come
into play if it modifies the competitive conditions in the market.92
The competitive relationship occurs in the marketplace, albeit an idealized one in the case of EC-
Asbestos,93 where the hypothetical consumer is fully informed. This has led Mavroidis to affirm
that the marketplace stays “in name only, since it is the reaction of a reasonable and not an actual
consumer that the AB used to determine likeness.”94 This idealized marketplace benchmark
makes it possible to circumvent the problems of lack of consumer information with respect to
processes and production methods.
Measures Affecting Imports of Fresh, Chilled and Frozen Beef (Complaint by the United States) (2000), WTO DocWT/DS161, 169/AB/R at para 133 (Appellate Body Report) [Korea-Beef]. 88 Ibid. 89 Robert Howse & Elisabeth Türk, “The WTO Impact on Internal Regulations - A Case Study of the Canada - EC Asbestos Dispute” in Grainne De Burca and Joanne Scott eds, The EU and the WTO: Legal and Constitutional Aspects (Oxford: Hart Publishing, 2001) 283, online: WorldTradeLaw <www.worldtradelaw.net/articles/howseasbestos.pdf> and Emily Barrett Lydgate, “Consumer Preferences and the National Treatment Principle: Emerging Environmental Regulations Prompt a New Look at an Old Problem” (2011) 10: 2 World Trade Review 165 at 169-170 [Lydgate, “Consumer”]. 90 US-Clove Cigarettes at paras 108 and 112. 91 See Robert Howse and Joanna Langille, “Permitting Pluralism: The Seal Products Dispute and Why the WTO Should Accept Trade Restrictions Justified by Noninstrumental Moral Values” (2012) 37:2 Yale J Int’l L 367 at 407-409. 92 Weihuan Zhou, “US-Clove Cigaresttes and US-Tuna II (Mexico): Implications for the Role of Regularory Purpose Under Article III:4 of the GATT” (2012) 15:4 JIEL 1075 at 1110. 93 Howse & Türk, supra note 89 at 289. 94 Petros C Mavroidis, Trade in Goods, 2nd ed (Oxford: Oxford University Press, 2012) at 282.
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Once the likeness of imported and domestic products has been ascertained, the test turns to less
favourable treatment, which occurs when imported products are detrimentally affected as a result
of the challenged measure and is akin to “as to afford protectionism”.95 In Korea-Beef, the AB
held that differential treatment between like imported and domestic products was permitted as
long as it was not discriminatory.96 If the differentiated treatment alters competitive conditions
by affecting negatively the imported products, then the differentiated treatment is considered
discriminatory. Reaffirming its rulings in Korea-Beef and EC-Asbestos, the AB in US-Clove
Cigarettes held that that the analysis of less favourable treatment under Article III:4 focuses on
the “conditions of competition.”97 The AB also seems to have introduced the regulatory purpose
under the less favourable treatment analysis echoing the rationale in DR-Cigarettes. As such
detrimental effects on imported products may be explained by external factors or circumstances
other than the origin, that is regulatory purposes may explain treatment less favourable of
imported products.98 The design, structure, architecture and the overall application of the
challenged must then be examined to determine the treatment.99
Many commentators have maintained that EC-Asbestos applies an “asymmetric impact test” as a
standard of less favourable treatment thus creating no difference between the standards of non-
discrimination found in Articles III:2 and III:4. Under this test, if the measure affects a certain
group of the imported products more than the same group of domestic products, than the
imported products are treated less favourably than domestic products.100 Diebold therefore
argues that it becomes necessary to interpret identically the directly competitive or substitutable
products (Art III:2) and like products (Article III:4) to “maintain a balanced standard of non-
discrimination for tax and regulatory measures”.101 It is generally agreed that the standard of
95 Mavroidis, supra note 94 at 281. 96 Korea-Beef at para137. 97 US-Clove Cigarettes at para 177. 98 DR-Cigarettes at para 96. 99 Joost Pauwelyn, “The Unbearable Lightness of Likeness”, WTO Staff Working Paper ERSD-2006-08, September 2006 at 10-12. 100 Lothar Ehring, “De Facto Discrimination in World Trade Law: National Treatment and Most-Favoured-Nation Treatment―Or Equal Treatment?” (2002) 36:5 J World Trade 921. Diebold qualifies this as “disproportionate disadvantage test”, see Nicolas F Diebold, “Standards of Non-Discrimination in International Economic Law” (2011) 60:4 ICLQ 831 at 842 [Diebold, “Standards”]. 101 Diebold, supra note 3 at 117.
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“directly competitive or substitutable” is reflected in “like products” under Article III:4.102 The
foregoing reasoning and the recent jurisprudential findings leave some flexibility to include
PPMs in the less favourable treatment through the regulatory purpose but the DSB have not
removed the ambiguity pertaining to PPMs under the likeness test. Arguably, given that PPMs
would modify competitive conditions they could be considered to determine whether products
are like.103 However, in the light of EC-Asbestos, an analysis of climate change PPM measures is
not clear and cannot be undertaken in abstracto because the facts will influence the findings.
3.1.3 Three Suggested Approaches for PPMs
PPMs lie at the heart of both the likeness assessment and the determination of less favourable
treatment. Some commentators have proposed that the AB ruling in EC-Asbestos signals that
PPMs could be included in the analysis of likeness if they affect the competitive relationship
between imported and domestic products either in the analysis of consumers’ behaviour or in the
economic analysis.104 Trebilcock et al. argue that: 105
the evolution of WTO jurisprudence on the meaning of like products has rendered the PPMs notion largely irrelevant to the interpretation of Article III of the GATT, since the analysis of likeness is by no means limited to considerations of the physical characteristics of products, but also includes whether consumers view them as like or unlike, for example. Moreover, regulatory distinctions even between like products may be permissible, the AB has held, where the treatment is even-handed as between the group of like domestic and like imported products.
However, as will be further explained below, in the context of climate change the production and
consumption externalities blur the application of the market-based competitiveness relationship
based on consumers’ preferences.
Diebold suggests three conceptual accounts to analyse the likeness of PPMs 1) regulatory
likeness; 2) likeness analysis based on the PPMs; and 3) competitive likeness based on the four
102 See Vranes, Environment, supra note 43 at 199-200. Contra Choi, supra note 70 at 111-114, Trebilcock and Giri, supra note 71. 103 See Canada-FIT Measures at 5.63. 104 Low et al, supra note 59 at 495 105 Trebilcock et al, Regulation of Trade, supra note 9 at 666-667.
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traditional criteria.106 Drawing from his approach, this section suggests three analytical
frameworks for PPMs: i) under an objective approach encompassing the four traditional criteria
(and thus part of the analysis of the competitive relationship); ii) under a contextual approach
which draws from the regulatory purpose approach; and finally, iii) under an economic approach.
Unlike Diebold who favours a more economic-based approach to likeness, this author maintains
that a contextual approach would be best adapted to reflect to the climate change PPM measures.
3.1.3.1 PPMs and the Objective Approach
This approach examines how PPMs could integrate the likeness analysis under the four criteria.
Given that all relevant factors must be considered to determine likeness, it could be argued that
PPMs should be taken into consideration in the analysis. It is easier to accept that a product-
related PPM could be considered a component of product characteristics because it leaves a
tangible trace on the product. The real challenge is with regard to unincorporated PPMs. Yet,
how can a process that leaves no visible trace in a product be considered part of its
characteristics?
These four criteria embody both formal and functional aspects of products.107 Although the AB
in EC-Asbestos cautioned against combining different and distinct elements during the analysis
of each criterion, it also acknowledged that some criteria can be interconnected with one
another.108
Product characteristics refer to the physical properties of a product, such as colour, taste,
consistency, nature and quality. In fact, all properties that enable a product to be identifiable
would be considered under this heading. PPMs do not constitute organoleptic characteristics but
nonetheless are part what makes a product as a whole. In other words, products should be
conceived of as the sum of all the manufacturing stages that involve them. Furthermore,
technology and innovation that enter the production chain are becoming increasingly important
and enhance a distinction between products in the market. As such it could be argued that they
are part of the product. Put differently, like products are characteristically different as a result of
106 Diebold, supra note 3 at 340-342. 107 Trebilcock et al, Regulation of Trade, supra note 9 at 74. 108 EC-Asbestos at para 111.
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the production method. This may seem a stretch of the imagination and certainly requires
revamping how product characteristics are traditionally thought of. Under the product
characteristics heading, this author submits that a contemporary concept should resort to
including the processes and methods since they relate to the product characteristics per se even
though they do not leave visible traces and will modify increasingly the competitive conditions
in the market.
The fact that a product uses a different process will likely not affect its end-use, regardless of
whether the PPM is product-related or non-product related. Although some products made from
fossil fuel energy may be ousted from an industry, forcing them to serve different ends. If all cars
were to be fuelled by electricity or biodiesel, oil and gas would need to find new purposes.
Regarding tariff classification, it has been suggested that new tariffs be created in the
Harmonised System to include new tariff classifications covering environmental goods and
renewable energy.109 This is not without its share of challenges, both technological and political.
On the one hand, technology would make it difficult for customs agents to verify the products
whose tariff classification was based on PPMs. On the other hand, the almost stagnant
discussions on trade and environment and other significant issues at the WTO may render such
an amendment to tariff classification unrealistic. End-use and tariff classification are two criteria
that would probably not be affected in the determination of PPM likeness.
The criterion of consumers’ preferences reflects the consumers’ appreciation of a product’s
function.110 With regard to climate change, Vranes suggests that consumers’ preferences will
play a significant role in an eventual climate change WTO challenge.111 Indeed, Green rightly
observes that the importance of the climate change concerns may alter consumers’ perceptions
and would support a finding of unlike products based on different PPMs. Caution is advised
however as consumers may disregard or not be aware of the negative externalities (either
109 Pott, supra note 11 at 14 and 30. The author further argues that while the implementation of such tariff classification is not without challenges due to the difficulty of verification and enforcement at the border, these obstacles are diminishing through third party certification and verification systems. I would argue that his view is highly optimistic as many PPMs would be very difficult to trace and measure and also the diversity of third party certification and verification systems raise the problem of compatibility. 110 US-Clove Cigarettes at para 125. 111 Erich Vranes, “Climate Labelling and the WTO – The 2010 EU Ecolabelling Programme as a Test Case under WTO Law” (2011) EYIEL 205 at 216. [Vranes, “Ecolabelling”]
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consumption or production) related to PPMs.
The consumer perspective criterion is undeniably the most complex, yet pertinent, criterion in
the PPM discussions. For some, this criterion represents the path to legitimizing differential
treatment between the products.112 It is closely connected to the analysis of the competitive
relationship between products. Indeed, the AB in US-Clove Cigarettes reiterated: “in an analysis
of likeness based on products’ competitive relationship, it is the market that defines the scope of
consumers whose preferences are relevant.”113 The “quality” of a product is also a measure of
the consumers’ “perception” attached to the product and that consumer’s perception can likely be
affected by how the product was made, without being dispositive in the assessment. This
criterion requires examining perceptions and uses of the product. It would have to be established
whether consumers distinguish between PPMs and to what extent they would be substitutable.
For instance, would a consumer consider aluminum produced from hydroelectricity (clean
energy) different from aluminum produced from fossil fuels (dirty energy)? If clean energy
aluminum costs considerably more than dirty energy aluminum, it is difficult to conceive that
many consumers (company or other buyer), as a rational economic agent, would not substitute
one for the other to, say, increase the profit margin. This supposes a short-term economic
perspective, however, and it could be argued that a longer-term economic perspective would
encourage the consumer to opt for the more expensive, clean energy product, only if
consumption or production externalities are internalized by a measure.
In EC-Asbestos, the health risks were key differences and concrete and impacted directly on
consumers. Thus, consumers’ preference was influenced by considerations of health risks.
Concomitant considerations may not be applicable with respect to PPMs in the climate change
context. First of all, climate-change PPMs would only have indirect effects on the consumer.
Whether these effects are positive, for instance reduction of GHG emissions thus improving air
quality, or negative in that climate change ultimately affects the health of most human beings,
these effects are more “diffused” in respect of individuals because they primarily affect the
global commons. Consumers may therefore not perceive differences between climate friendly
and climate unfriendly PPMs. In fact, Horn and Mavroidis contend that “the purchasing decision
112 Pott, supra note 11 at 14. 113 US-Clove Cigarettes at para 137.
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of an individual consumer has negligible impact on the environment” and there is no reason why
consumers would treat products differently.114 They argue that products would therefore be
found directly competitive and possibly like despite the differences in regulatory purpose.115
The consumers’ preference criterion in the context of climate change PPMs may be difficult to
prove with statistics and surveys. This is due in part to the nature of climate-change PPMs and in
part to the paucity of available information. Therefore, a panel would likely turn to the “idealized
marketplace”,116 where no information asymmetry exists and negative externalities are
internalized.117 The consumer then relies on perfect information to make his decisions. Given the
considerable deterioration of the environment, the growing importance of climate change as
public policy and the seriousness of consequences that some consumers will experience due to
climate change (e.g. consumers hit by Hurricane Sandy), consumers would perhaps treat climate-
change PPMs differently if they have no choice, for example faced with a carbon tax.
Consumers’ perceptions vary from one country to another and consumers in developing
countries lag behind with regard to climate change issues and concerns. The AB in US-Clove
Cigarette stated that if the products are “highly substitutable for some consumers but not for
others, this may also support a finding that the products are like.”118 This however is a broad
interpretation because any two products are likely going to be substitutable for some and not for
others. The AB has not provided helpful guidance regarding this specific issue.
Another option, albeit a more drastic one, would be to broaden the four criteria to officially add
PPMs as a fifth, thereby explicitly incorporating the PPM feature as one of the traditional criteria
to be considered when examining products and assessing likeness.119 The advantage of this
proposal is that it indicates that production methods, while important as one of the factors, are to
114 Horn & Mavroidis, supra note 71 at 1917. 115 Ibid. 116 Howse & Türk, supra note 89. 117 Trebilcock et al, Regulation of Trade, supra note 9 at 161. 118 US-Clove Cigarettes at 142. 119 Pott, supra note 11 at 14. See also Diebold, supra note 3 at 10ff.
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be considered distinct from product characteristics. This would squeeze and stretch the accordion
of likeness to reflect technological advances and public policy concerns.120
3.1.3.2 PPMs and the Contextual Approach
PPM measures aim at ensuring that public policy concerning climate change, the environment or
health policies are incorporated into the market. A contextual approach that would examine the
regulatory purpose of a measure would respond with more flexibility to common concern
policies and provide openness for PPMs. Based on the regulatory purpose, a PPM measure
would not necessarily be found discriminatory. Therefore, in the case of a PPM measure related
to climate change, the complainant would have the burden of proving that the regulatory
distinction is protectionist. Charnovitz maintains that the “aims and effects test could have
provided a doctrinal basis for distinguishing two otherwise like products that differ only in
conformity to the PPM.”121
The contextual approach calls for consideration of the regulatory purpose as part of the
comparator elements between the domestic and imported products. It is argued that given the
intrinsic public policy element of PPMs, this approach would best suit these types of measures.
The aims and effect test has completely disappeared because it permits “enhancing the regulatory
autonomy of Members.”122 Indeed critiques have exposed the weakness of the approach as
leaving regulatory protectionist measures unchecked as well as undermining Article XX of the
GATT.123 Conversely, other commentators have further argued that the WTO tribunals have
embraced a “juridical conception of competitive equality” resembling the aims and effects
approach and must take into account the design, architecture and structure of the measure. This
provides for some leeway with regard to PPMs. As long as the measure’s aim is not blatant
protectionism in favour of domestic products, the regulatory approach could be used as part of
120 Japan – Alcoholic Beverages at 21. Choi supports the idea of expanding the “old approach”. Choi, supra note 70 at 155. See also Won-Mog Choi, “How More 'Likeness' in Addressing Technical Regulations?” (2012) Society of International Economic Law (SIEL), 3rd Biennial Global Conference [Choi, “Technical Regulation”]. 121 Charnovitz, supra note 2 at 90 and Puth, supra note 4 at 240ff. 122 Japan – Alcoholic Beverages. See also Choi, “Technical Regulations”, supra note 120 at 6. 123 Sungjoon Cho, “Linkage of Free Trade and Social Regulation: Moving beyond the Entropic Dilemma” (2005) 5:2 Chicago J Int’l L 625 at 654.
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the likeness analysis thus enabling PPMs to be part of the elements to be considered based on the
objectives they embody.124
As discussed above, the aims and effect approach has evolved into a more holistic analysis since
EC-Asbestos. It is important to note here that the contextual approach may be more acceptable as
part of the “less favourable treatment analysis” and would provide a viable alternative option to
consider PPMs. In the light of the EC-Asbestos decision and the recent Trilogy case law under
the TBT Agreement, a DSB may consider the regulatory purpose of a PPM measure to ascertain
the discriminatory nature or not of a measure.
3.1.3.3 PPMs and the Economic Approach125
Under the economic approach, an analysis of elements must be in the context of market
dynamics, such as the cross-price demand elasticity, elasticity of substitution between products,
an approach that resembles the approaches under competition law or anti-trust law to defining
relevant product markets.126 Accordingly, likeness (or directly competitive or substitutable) is
determined relying on econometric evidence. Trebilcock and Giri suggest examining how the
measure affects the actual competitive relationship between imported and domestic products.127
They further argue that countries or producers enter in a competitive relationship and gain
comparative advantage in a market due to production processes that may differ between them.128
Producers may be more competitive because of lower-cost production, for example. With regard
to climate change, the competitive relationship may turn on the processes involved. As Howse
and Levy note, there is no threshold to determine that products are directly competitive.129 This
is particularly accurate for climate change. Consumers may find gasoline from oil objectionable
and privilege biofuel and be willing to pay more to obtain the latter; however, if a financial crisis
overhangs economic growth and unemployment lurks, consumers may no longer be willing to
124 Regan is a great defender of this approach as part of determining like products. See Regan, supra note 6. 125 Pott argues that the economic approach is not an appropriate approach for preventing the use of product unlikeness as a basis for protectionism because consumers’ preference vary “infinitely across different economic and cultural settings.” See Pott, supra note 11 at 17. 126 Trebilcock & Giri, supra note 71. 127 Ibid and see Choi, supra note 70. 128 Trebilcock & Giri, ibid at 57. 129 Robert Howse and Philip I Levy, “TBT Panels: US-Clove, US-Tuna, US-COOL” (2013) 12:2 World Trade Review 327 at 341.
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pay a price premium for sustainable biofuel. Are the products really directly competitive?
According to Low et al., market determination will generally conclude that products embodying
different PPMs (npr) are competitive and thus like. The authors therefore maintain that GHG
emissions in the production process would not per se be considered a determining factor of
likeness where an imported and domestic product compete in the relevant market.130 The
economic approach would prevent considering the broader regulatory purpose of a PPM
measure, which may be conceived as intervening in consumers’ choices by pushing toward or
pulling them away from a product.131
Applying the economic approach to a determination of PPM likeness emphasizes its weaknesses:
in the climate change context quantitative analyses or cross-price elasticity analyses would be
difficult to prove. It ignores the consumption and production externalities, key issues for climate
change PPMs. In addition, processes and methods may be difficult to quantify and adding the
climate change variable to PPMs would certainly make econometric assessments more
hypothetical than actual.
3.1.4 General Exceptions under Article XX
A discriminatory measure under the national treatment principle could be justified under Article
XX and hence be saved from inconsistency with WTO law. However, to be compliant with
Article XX, a priori claims of legitimate objectives must be real, not frivolous, marginal or
insignificant.132 While climate change unilateral measures can be positive environmental signals
demonstrating a desire to react to climate change problems, they also underline an all too blatant
dichotomy that evidences a disconnect between trade and climate change.
Pursuant to Article XX, a measure must comply with the two-pronged test established in US-
130 Low et al, supra note 59 at 496. 131 Epps and Green, supra note 5 at 71. See also Andrew Green, “Climate Change, Regulatory Policy and the WTO: How Constraining are Trade Rules?” (2005) 8(1) JIEL 143. 132Brazil - Measures Affecting Imports of Retreaded Tyres (Complaint by European Commission) (2007), WTO Doc WT/DS332/AB/R at para 210 (Appellate Body Report) [Brazil-Retreaded Tyres].
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Gasoline and reaffirmed in US-Shrimp.133 First, a measure must qualify under one of the specific
exceptions set out in paragraphs a) to j). In the case of climate change, these would either be
under Article XX(b) where the measure is “necessary to protect human, animal or plant life or
health” or under Article XX(g) “relating to the conservation of exhaustible natural resources if
such measures are made effective in conjunction with restrictions on domestic production or
consumption.” Once a measure has been found consistent within the scope of one of the listed
exceptions, the analysis then turns to conformity with the chapeau of Article XX. The chapeau
embodies the principle of good faith and ensures that Members are not acting in an abusive
manner with regard to their rights to regulate.134 This section will focus on the two exceptions
likely to be invoked in the context of a climate change PPM measure, namely XX(b) and XX(g).
3.1.4.1 Article XX(b)
Article XX(b) allows for a measure necessary to protect human, animal or plant life or health.
The necessity test has been qualified by many as a difficult threshold to satisfy in particular with
respect to climate change.135 In Korea- Beef the AB indicated that for a measure to be necessary
it does not need to be indispensable or of absolute necessity or inevitable.136
An analysis under Article XX(b) must entail first and foremost an environmental measure.137
This test entails weighing and balancing of the objective and values of the sustainability criteria
and the extent to which they contribute to achieving its objective of the ends pursued” as well as
“the restrictive impact of the measure on international commerce.”
Under Article XX(b), the challenged measure must make a material contribution to the
protection the environment, not a mere marginal one.138 Determining the ends and means of a
133 United States—Standards for Reformulated and Conventional Gasoline (Complaint by the Brazil and Venezuela) (1996) WTO Doc WT/DS/9/AB/R (Appellate Body Report) [US-Gasoline]; and United States—Import Prohibition of Certain Shrimp and Shrimp Products (Complaint by India et al) (1998), WTO Doc WT/DS58/AB/R (Appellate Body Report) [US-Shrimp]. 134 US-Shrimp at para 158. 135 See for example Pauwelyn, “BTA”, supra note 80. 136 Korea-Beef at para 161. 137 James Bacchus, “Questions in Search of Answers : Trade, Climate Change, and the Rule of Law” (Keynote Address delivered at the Conference on Climate Change, Trade and Competitiveness: Issues for the WTO, 16 June 2010). 138 Brazil-Retreaded Tyres at paras 143-151 and 210.
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policy is likely to be difficult with respect to climate change measures given that the ends of a
climate change measure are still difficult to assess. However, the AB in Brazil-Retreaded Tyres
recognized the time sensitivity nature of climate change policies may need to be extended to a
longer lifespan, including assessing projections in the future:139
[T]he results obtained from certain actions—for instance, measures adopted in order to attenuate global warming and climate change, or certain preventive actions to reduce the incidence of diseases that may manifest themselves only after a certain period of time—can only be evaluated with the benefit of time.
The respondent to the challenge must also prove that no reasonable and less trade restrictive
alternative measure could have achieved the objective fulfilled by the discriminatory measure.
The alternative must be within access and cannot impose a disproportionate burden on the
respondent. Again, this can be problematic for climate change measures, as innovation may not
be within the technological and financial reach of all countries. Furthermore, if applying the
“common but differentiated responsibilities”, the WTO may have to moderate this assessment to
take into account different ways of addressing climate change, by different countries.
3.1.4.2 Article XX(g)
In the context of climate change, challenges would certainly raise the exception of Article XX(g)
since the AB in US-Gasoline interpreted exhaustible natural resources broadly so as to
encompass the notion of clean air and thus climate change issues. There ought to be no doubt
about the interconnectedness between clean air and climate change and it is highly unlikely that a
measure regulating GHG emissions would not be considered linked to preserving exhaustible
natural resources.140
An Article XX(g) consistency requires first that the measure relate to the preservation of the
exhaustible natural resource, which implicates a “close and genuine relationship of ends and
means” 141 with the objectives. Under this analysis, regulations as a whole must relate to the
legitimate objective of preserving clear air. This may prove challenging for some climate change
PPM measures that have tilted on the side of more economic objectives such as the level playing
139 Ibid at paras 151-153. 140 Gary Clyde Hufbauer, Steve Charnovitz & Jisun Kim, Global Warming and the World Trading System, (Washington DC: Peterson Institute for International Economics, 2009). 141 US-Shrimp at para 136.
39
field of competitive conditions, for example BTAs. In US-Shrimp, the AB addressed the issue of
extraterritoriality. This is of particular importance for any climate change measure as it is
transboundary with its effects by nature. According to the AB, if sufficient nexus exists between
the measure and the objective, a measure that would have extraterritorial effects could be
justified.142
Second, the measure must be “made effective in conjunction with restrictions on domestic
production and consumption.”143 In other words, a measure must even-handedly impose
restrictions on imported and domestic products.
3.1.4.3 The Chapeau The last step under Article XX and by far the more difficult to satisfy requires determining
whether the discriminatory measure constitutes arbitrary and unjustifiable discrimination or a
disguised restriction on trade. Its language sets out three components to be met: whether the
nature and quality of discrimination is different from the discrimination in the treatment of
products which was already found to be inconsistent with the substantive obligations of the
GATT, e.g. Articles I and III; whether the discrimination is arbitrary and unjustifiable in
character; and whether discrimination takes place between countries where the same conditions
prevail.144 It serves as a safeguard against any abuse of the exceptions: 145
[T]he conditions in the chapeau control the abuse of rights and they regulate the overall balance of rights and obligations struck by Art. XX. However, interpreting the chapeau so as to vitiate the meaning of the rights contained in the operative paragraphs of Art. XX would be inappropriate.
A tribunal will need to examine the reasons that justify the discriminatory measure. In Brazil-
Retreaded Tyres, the AB held that the analysis relates to the cause or rationale of the
discrimination146 thereby inferring that a tribunal must examine the broader scope of the
measure as a whole rather than the specific discriminatory provision.
142 Ibid at para 133. 143 US-Gasoline at paras 21ff. 144 US-Shrimp 145 Robert Howse, “The Appellate Body Rulings in the Shrimp/Turtle Case: A New Legal Baseline for the Trade and Environment Debate” (2002) 27 Colum J Envtl L 491 at 499. 146 Brazil-Retreaded Tyres at para 225.
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3.1.5 Technical Barriers to Trade Agreement
The TBT Agreement aims at striking a balance between a country’s right to regulate to protect
legitimate national public policy concerns and liberalization of trade. As Kudryavtsev notes,
attaining such a balance can prove to be no small task.147 While the GATT was designed without
much consideration for regulatory policies, the TBT Agreement steps in to fill that void and
should be understood as focusing on regulatory policies.148
The TBT Agreement sets out the obligations covering technical regulations, standards, and
conformity assessments. Few cases have discussed the TBT Agreement until recently, when
consecutively three decisions – US-Clove Cigarettes, US-Tuna III, and US-COOL – examined
core provisions.149
The TBT Agreement is particularly relevant in the context of climate change as it regulates non-
private labelling and certification schemes as well as any measures qualified as technical
regulations.150 This section first outlines the definition of technical regulations and the concerns
raised by PPMs and then examines Articles 2.1 and 2.2 in light of the recent jurisprudence.
3.1.5.1 Technical Regulations and Standards
Technical regulations and standards reveal discrepancies between countries as to how they
regulate, which may be justified on grounds of geography or climate. For instance, the
mandatory requirement to drive a car with winter tires between December 15 and March 15 in
Québec151 is explained by its rigorous snowy climate, a reality unknown in British Columbia
whose milder climate does not require this safety regulation.
147 Arkady Kudryavtsev, “The TBT Agreement in Context” in Michael J Trebilcock and Tracey Epps, eds Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013) (draft). 148 Petros C Mavroidis, “Driftin’ too far from Shore – Why the Test for Compliance with the TBT Agreement Developed by the WTO Appellate Body is Wrong, and What Should the AB Have Done Instead” (2013) 12:3 World Trade Review 1 at 8-9 [Mavroidis, “TBT Compliance”]. 149 The Panel and the Appellate Body decisions in all three cases have spurred a lot of controversy among scholars for having incorrectly interpreted the TBT Agreement. See for example Howse & Levy, supra note 129; and Mavroidis, ibid. 150 Michael Cardwell and Fiona Smith, “Contemporary Problems of Climate Change and the TBT Agreement: Moving Beyond Eco-labelling” in Michael J Trebilcock and Tracey Epps, eds Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013) (draft). 151 Highway Safety Code, RSQ c 24.2 at article 440.1.
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Ecolabelling, for example, can be considered either a technical regulation, if it is mandatory, 152
or a standard in the case of voluntary schemes.153 The difference lies in market access: by not
complying with a standard, the product continues to have access to the market but may not be
used or sold due to private or consumer decisions; by not complying with a mandatory regime,
the product loses its access to the market. The TBT Agreement does not cover private standards
designed and operated by non-governmental entities, which lends it a limited scope in an area
like labelling where many private initiatives come into play and can increase the difficulties for
exporters to obtain real market access.
Pursuant to Annex 1 Article 1.1 of the TBT Agreement, “technical regulation” is defined as:
[A] document which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.
And “standard” as:
[A] document approved by a recognised body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.
Standards are covered under the Code of Good Practice for the Preparation, Adoption and
Application of Standards (TBT Code).154 Members must take reasonable measure that local
governments comply with the Code which comprises some of the main principles such as that a
standard not treat less favourable an imported product (Article D) and that a standard no be an
unnecessary obstacles to trade (Article E).
Three criteria must be met for a measure to be considered a technical regulation:155 the document
has to apply to an identifiable group of products, the document must lay down one or more
152 Article 2 of the TBT Agreement. 153 Article 4 of the TBT Agreement. 154 Annex 3 of TBT Agreement. 155 These criteria were set out in EC – Asbestos at paras 67-70, reiterated in European Commission – Trade Description of Sardines (Complaint by Peru) (2002), WTO Doc WT/DS231/AB/R (Appellate Body Report) [EC-Sardines] and US-Tuna III at para 183.
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characteristics of the product and finally, compliance with the characteristics must be
mandatory.156
The first step necessitates identifying the products without requiring the express label or
identification of the product in the measure.157 In its examination of the second prong, the AB in
EC-Sardines determined that in order for preserved sardines to be sold, they had to comply with
the product characteristics. It found that compliance with the characteristics laid down in a
document must be mandatory with respect to the identifiable product, which implies that a
document provides the features of products or means or identification.158 The AB in US-Tuna III
held that the “dolphin-safe” label was a technical regulation on the grounds that compliance with
the US labelling was mandatory because the scheme prescribed the conditions under which tuna
may be labelled by using the “negative form”: No tuna product could be labelled “dolphin-
friendly” unless it complied with the requirements of the labelling scheme.159 The Panel did not
acknowledge that tuna products bearing other labels could still enter the US market. As Howse
and Levy rightly observe, this statement could make all standards and labelling regimes fall
within the definition of technical regulations.160 The Panel and the AB discarded the fact that the
tuna products not labelled “dolphin-safe” continued to have access to the US market.
3.1.5.2 Less favourable treatment under the TBT Agreement
Article 2.1 embodies non-discrimination in toto by comprising the most-favoured-nation and
national treatment obligations. Contrary to the GATT, there are no exception provisions similar
to Article XX under the TBT Agreement. Article 2.2 of the TBT Agreement provides a non-
exhaustive list of legitimate objectives including the protection of human health or safety, animal
or plant life or health, and the environment. The striking similarity with Article XX of the
156 EC-Sardines at paras 175-76. 157 EC-Asbestos at para 70. 158 EC-Asbestos at para 67 and EC-Sardines at 189. 159 Panel Report, US-Tuna III at para 7.131 and Appellate Body Report, US-Tuna III at paras 172-195. In a dissenting opinion, one of the Panelists opposed the Panel’s conclusion and argued that the label was voluntary because tuna products could continue to have access to the US market without the “dolphin safe” label. 160 Howse & Levy, supra note 129 at 354ff and Mavroidis, “TBT Compliance”, supra note 148.
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GATT, albeit in the TBT context, has led some authors to contend that Article 2.2 reflects
Article XX without the chapeau.161
Article 2.1 requires that WTO Members ensure that, “in respect of technical regulations,
products imported from the territory of any Member shall be accorded treatment no less
favourable than that accorded to like products of national origin and to like products originating
in any other country.” Under the TBT Agreement, a measure complying with the non-
discrimination principle refers to an analysis of the “conformity with the product characteristics
embedded in the technical regulation.”162
The AB in US-Clove Cigarettes drew considerably from previous decisions under Article III:4 to
instruct on the meaning of treatment no less favourable under the TBT Agreement163 while
acknowledging that Article 2.1 was to be interpreted in the context of the TBT Agreement.
Given the express wording in Article 2.1 that no less favourable treatment is to be accorded to
“products imported from the territory of any Member,” the AB in US-Clove Cigarettes
concluded that the comparator required looking at imported products against the domestic
product and like products regardless of their origin.164 The likeness threshold focuses on an
assessment of the nature and extent of the competitive relationship requiring “a sufficiently close
competitive relationship with the products imported from the complaining Member to be
considered like products within the meaning of that provision.”165
The AB did not entirely dismiss the concept of regulatory purpose but rather moved it under the
assessment of the nature and extent of the competitive relationship instead of being the basis of
the likeness determination. It further indicated that:166
the existence of a detrimental impact on competitive opportunities for the group of imported vis-à-vis the group of domestic like products is not dispositive of less favourable treatment under
161 Sungjoon Cho, “The Rise of the TBT Jurisprudence?” (1 July 2012), online: World Trade Law Blog <http://worldtradelaw.typepad.com>. 162 Mavroidis, “TBT Compliance”, supra note 148 at 11. 163 US-Clove Cigarettes at para 180. 164 US-Clove Cigarettes at paras 190-194. 165 US-Clove Cigarettes at para 191. See Tania Voon, Andrew Mitchell & Catherine Gascoigne, “Consumer Information, Consumer Preferences And Product Labels Under The TBT Agreement” in Michael J Trebilcock and Tracey Epps eds, Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013) (draft) referring to terminology coined respectively by Lothar Ehring and Nicolas Diebold; see also Ehring, supra note 100 at 924 and Diebold, “Standards” supra note 100 at 842. 166 US-Clove Cigarettes at para 182.
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Article 2.1. Instead, a panel must further analyze whether the detrimental impact on imports stems exclusively from a legitimate regulatory distinction rather than reflecting discrimination against the group of imported products. In making this determination, a panel must carefully scrutinize the particular circumstances of the case, that is, the design, architecture, revealing structure, operation, and application of the technical regulation at issue, and, in particular, whether that technical regulation is even-handed, in order to determine whether it discriminates against the group of imported products.
The “less favourable treatment” analysis under Article 2.1 in US-Clove Cigarettes relied on the
particular circumstances of the case, namely the “design, architecture, revealing structure,
operation, and application of the technical regulation at issue, and, in particular, whether that
technical regulation is even-handed.”167 A detrimental effect is not sufficient for a treatment to
be less favourable. Other circumstances that are not linked to the origin of the product can
explain such an effect without there be a violation Article 2.1.168 The AB seems to have
confirmed the locus of regulatory purpose under the less favourable treatment analysis affirming
that the context and objective of the TBT Agreement lent itself to this.169 It advocated the two-
test approach entailing: (i) an assessment of whether the technical regulation at issue modifies
the conditions of competition to the detriment of the imported product as compared to the
domestic like product or the like product originating in another Member; and (ii) a determination
of whether any detrimental impact results from regulatory distinction.170 Accordingly and
following the finding in US-Clove Cigarettes, the AB in US-Tuna III considered that the
negative effect of the “dolphin-safe” labelling scheme had an adverse impact on the competitive
conditions in the US market. It determined that such an effect was discriminatory because it was
not “exclusively” the result of a regulatory purpose.171
3.1.5.3 Unnecessary obstacles
Under Article 2.2, technical regulation must not constitute “unnecessary obstacles to trade” and
not be more trade restrictive than necessary to fulfil a legitimate objective. This echoes the
167 US-Tuna III at para 225. 168 Ibid at para 215 and US-Clove Cigarettes at para 182. 169 US-Clove Cigarettes at paras 169-175. 170 US-Tuna III at para 232. 171 Ibid at para 297.
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necessity test under Article XX with the burden of proof falls on the respondent.172 Furthermore,
the enumerated legitimate objectives consist in part of a non-exhaustive list, as indicated by the
use of the words “inter alia”.
Examining the issue of “least trade restrictive” test, the AB in US-Tuna III and US-COOL
incorporated the interpretation from rulings concerning Article XX.173 First, it clarified that in
the analysis of a claim under Article 2.2, it is necessary to “ascertain to what degree, or if at all,
the challenged technical regulation […] actually contributes to the legitimate objective
pursued”174 which is determined by taking into account the design, structure and operation of the
measure as well as from evidence relating to the application of the measure.175
The necessity test requires assessing specific factors, namely: i) the degree of contribution made
by the measure to the legitimate objective at issue; (ii) the trade-restrictiveness of the measure;
and (iii) the nature of the risks at issue and the gravity of consequences that would arise from
non-fulfilment of the objective(s) pursued by the Member through the measure.176 The AB in
US-Tuna III held that this required comparing the challenged measure with an alternative
considered less trade restrictive. If the latter can contribute to the same extent to the legitimate
objectives and without imposing additional costs, it becomes an acceptable alternative for the
purpose of Article 2.2.
3.1.5.4 TBT and PPMs
Doubts persist as to whether or not PPMs fall under the purview of the TBT Agreement,
especially among developing countries. However, as Marceau and Trachtman explain, removing
PPMs from the application of the TBT Agreement “would exempt them from the other
requirements of the TBT Agreement”, such as notification.177 By not being covered by the TBT
172 Gabrielle Marceau & Joel Trachtman, “A Map of the World Trade Organization Law of Domestic Regulation of Goods” in George A Bermann & Petros C Mavroidis eds, Trade and Human Health and Safety (Cambridge: Cambridge University Press, 2006) 9 at 28-29. 173 Voon et al, supra note 165. 174 US-Tuna III at para 317. 175 Ibid. 176 US-Tuna III at paras 318 and 322. 177 See Marceau & Trachtman, supra note 172 at 61; see also Low et al, supra note 59 at 522. Vranes argues that there is a misconception about the fact that the TBT Agreement allows measures when in fact it provides additional
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Agreement, this would require that measures be compatible with WTO law through a
determination under Article III, or the exceptions under Article XX of the GATT.178
Some WTO Members agree that the TBT Agreement includes product-related PPMs, though the
same cannot be said of nprPPMs.179 The negotiating history of the TBT Agreement indicates that
while opinions diverged on the issue, most countries were opposed to including nprPPMs under
the agreement.180 Marceau and Trachtman turn to the travaux préparatoires of the previous
Tokyo Rounds Standards Code and remark that process measures were expressly excluded from
these first iterations of the Standards Code.181 The authors further underline that “[e]arly debates
during the Uruguay Round about the definition of technical barriers to trade were motivated by a
desire to include processes and production methods within the disciplines of the TBT
Agreement, in order to prevent them from becoming barriers to trade.”182
The report of the Committee on Trade and Environment (CTE) in 1996 shows a wide spectrum
of opinion with respect to PPMs and standards as they relate to the environment, in particular
with regard to ecolabelling.183 At one end, some Members agreed that the negotiating history of
the TBT Agreement indicated clearly that there was “no intention of legitimizing the use of
measures based on non-product-related PPMs under the TBT Agreement, and that voluntary
standards based on such PPMs are inconsistent with the provisions of the Agreement as well as
with other provisions of the GATT.”184 At the opposite end, other countries indicated
categorically that nprPPM measures did not fall within the TBT Agreement.185 An apparently
disciplines to the GATT that “tend to be stricter” and that as such developing countries ought to advocate for the coverage of the TBT Agreement. See Vranes, Environment, supra note 43 at 319 ff. 178 See Marceau & Trachtman, supra note 172 at 59. 179 See Appleton, supra note 11 at 139. 180 Committee on Technical Barriers to Trade, Negotiating History of the Coverage of the Agreement on Technical Barriers to Trade with regard to Labelling Requirements, Voluntary Standards and Processes and Production Methods Unrelated to Product Characteristics, Note by the Secretariat, G/TBT/W11, dated 29 August 1995. 181 See Marceau and Trachtman, supra note 5 at footnote 204 citing the Standards Code dated 20 January 1972, the drafts of June 1976 and May 1977. 182 Ibid at 58. 183 WTO, Report of the Committee on Trade and Environment (held on 8 November 1996), WTO Doc W/CTE/1 1996 [Report CTE 1996]. See also Conrad, supra note 4. 184 Report CTE 1996, supra note 184 at para 70. 185 Ibid at para 72.
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more balanced view considered that “all forms of eco-labelling, including eco-labels that involve
non-product-related PPMs, are covered by the TBT Agreement and that the inclusion of non-
product-related PPM-based elements in an eco-labelling regime is not per se a violation of WTO
rules.”186 According to this view, the TBT Agreement provides sufficient flexibility to permit
nprPPM-based ecolabelling to be used, subject to appropriate trade disciplines, and the validity
of any eco-labelling regime under the WTO must be judged according to the relevant rules of the
multilateral trading system.”187
This overview of early discussions in the CTE shows an obvious lack of consensus on the
question of PPMs and sketches the myriad views that exist, validating the claim made by some
that this issue is “one of the most debated questions in the discussions of the WTO Committee on
Trade and Environment.”188
The above-illustrated ambiguity can be explained by reverting to the wording of the definitions
of technical regulations and standards. The first sentence dictates that “document which lays
down product characteristics or their related processes and production methods.”189 With the
precision qualifier “of their related” in the first sentence, many analysts have argued that PPMs
affecting products are covered whereas the absence of this qualifier in the second sentence
(“…labeling requirement as they apply to a product, processes and production methods”) leaves
room for an interpretation including nprPPMs. Howse has suggested a broader approach
discarding the distinction between process and product and argues that the words “product
characteristics” only reflect that the TBT Agreement covers products as opposed to services but
that PPMs encompass those that are indiscernible in the product. In fact, the US-Tuna III Panel
examining technical regulations confirmed that reading.190 As Cardwell and Smith suggest, “the
second sentence of both provisions merely sets out a list of issues that might be included in such
a document: it does not act to exclude certain issues like nprPPMs per se.”191
186 Ibid at para 73. 187 Ibid at para 74. 188 Vranes, Environment, supra note 43 at 319ff. 189 Our emphasis. 190 Panel Report, US-Tuna III at para 7.79. 191 Cardwell & Smith, supra note 150 at 16.
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In US-Tuna III, the AB entirely avoided addressing the PPM issue and instead accepted the
Panel’s finding that the label applied to the tuna product. A careful review of the Panel’s analysis
indicates it is bereft of explanation and circumvents the discussion of PPMs in the definition of
technical regulations as well as whether PPMs are an element to consider in the analysis of non-
discrimination. In its arguments, the US specified that the labelling measures did not “set out
product characteristics for tuna products” but rather marked “the conditions under which tuna
products may be labelled dolphin-safe.”192 The panel concluded that the labelling requirements
laid down in the US dolphin-safe labelling provisions applied to the tuna products,193 rather than
to what it actually applies to, namely the fishing process, as clearly stipulated in the US federal
law:194
It is a violation of section 45 of title 15 for any producer, importer, exporter, distributor, or seller of any tuna product that is exported from or offered for sale in the United States to include on the label of that product the term “dolphin safe” or any other term or symbol that falsely claims or suggests that the tuna contained in the product were harvested using a method of fishing that is not harmful to dolphins if the product contains tuna harvested. [our emphasis]
Although the PPM component to the legislation is evident, the Panel simply disregarded its
relevance preferring to agree with the US assertion that the words “as they apply to” in the
second sentence of Article 1.1 Annex 1 meant that the labelling requirements, as well as
symbols, packaging and labeling must relate to and concern “a product, process or production
method.”195
While this conclusion seems to indicate that DSB are willing to accept that no distinction
between product-related PPMs and nprPPMs exist, it remains unclear how future panels will
analyze the issue with respect to the first and second sentence of Article 1.1 of Annex 1 of the
TBT Agreement, since the Panel chose not to address the more contentious issue as to whether
PPMs and nprPPMs are “captured within the notion of technical regulations.”196 For the time
being, many commentators have opined that the distinction has vanished because the regulatory
192 Panel Report, US-Tuna III at para 7.66. 193 Ibid at para 7.78. 194 Marine Mamal Protection Act of 1972, Pub L No 101-627, §901, 104 Stat 4465; Pub L No 105-42, § 1385(d), 111 Stat 1125, online: GPO, <http://www.gpo.gov>. 195 Panel Report, US-Tuna III at para 7.78. 196 See Voon et al supra note 165.
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purpose included in the less favourable treatment assessment renders the distinction under
likeness unnecessary. Pauwelyn contends that the fact that the PPM issue was not appealed by
the US nor discussed in the AB ruling indicates that the tribunals ignored the fact that the
labelling in reality pertained to the process.197 Others have observed that analysis of technical
regulations “blurs the distinction” in the TBT Agreement between a voluntary “standard” and a
mandatory “technical regulation” and “suggests that any legislative or regulatory act that affects
market access and contains legally mandated and enforceable conditions may constitute a
technical regulation.”198 It has been left to other panels to decide whether measures other than
labels would include nprPPMs.
In summary, this section has provided an overview of the legal framework most problematic
with regard to climate change PPM measures and their jurisprudential status. It has been argued
that nothing under Article III and XX of the GATT excludes PPMs but rather that PPMs are to
be included in the analysis of likeness or directly competitive or substitutable. This section
submitted three approaches for using PPMs as a basis for determining that a measure is not
discriminatory under the national treatment principle. Unless a tribunal shows flexibility in
integrating PPMs as part of the four criteria, which would be the most straightforward way to
address PPM measures, albeit unlikely, recent decisions signal that the contextual approach
would permit DSB to consider the objectives underpinning PPMs. It suggested that while under
GATT PPMs have not been addressed other than through the general exception provision, the
Trilogy of cases under the TBT Agreement has removed, to a certain extent, the distinction
between process and product. Contrary to the DSB mechanism, where Members have not yet
directly addressed PPMs, the CTE and TBT Committee (TBTC) have been the fora for extensive
discussions on PPMs.
197 See comment by Joost Pauwelyn, “The End of the Distinction of PPM ? The Rise of International Standards?” (22 May 2012), online: WorldTradeLaw, <worldtradelaw.typepad.com>. 198 Laurens Ankersmit & Jessica C Lawrence, “The Future of Environmental Labelling: the Tuna II panel and the scope of the TBT,” (2012) 39:1 Legal Issues of Economic Integration 127-147. See also Howse & Levy, supra note 129.
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3.2 WTO Committees
This section explores the manner in which PPMs have been discussed through extensive
exchanges and openness in the TBTC and the CTE. It will first focus on the TBTC and how
countries interact on environment-related PPMs. As a highly technical forum, it confers little
substance on PPMs. The TBTC nonetheless provides the formal context of the PPM debate
through the obligation of notification. The second part will provide an overview of the PPM
debate in the CTE. This platform offers discussions with more substance and often takes the
form of a dialogue among Members, although sometimes with repetitious litanies. Over the
years, the PPM topic has shifted from broad concerns to more precise ones: from food to GMOs,
ecolabelling to carbon footprint, environment to climate change and agriculture, and recently
BTAs. This section argues that the discussions at the CTE remain only discussions with no real
outcomes or practical action to regulate their impact. In addition, it seems that countries that
opposed PPMs in 1996 have remained entrenched in their position: PPMs create unnecessary
trade barriers and restrict market access.
Under the WTO, several committees exist to foster dialogue and information exchange, such as
the TBTC and the CTE. These Committees are more embodiments of political and governance
characteristics than the dispute settlement mechanism, whereby Members are provided with a
non-adversarial and information-seeking venue to explicate their measures that may be perceived
by others as discriminatory or as creating unnecessary barriers to trade.
The discussions are rather limited in scope and may not provide a complete portrait of domestic
and business realities. First, countries are likely to raise and solve issues at a bilateral level far
removed from the formalistic environment of the WTO.199 Second, these Committees provide
voices to governments who may filter and ultimately decide which concerns, measures and
positions, for political or strategic reasons, they want to raise. Those concerns may convey
political messages at the multilateral levels that have little to do with the reality that enterprises
face. They illuminate, nonetheless, the dynamics of a political dialogue, demonstrating the
199 Petros Mavroidis & Erik N Wijkström, “Moving Out of the Shadows: Bringing Transparency to Standards and Regulations in the WTO’s TBTC” at 289 in in Michael J Trebilcock and Tracey Epps, eds. Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013) (draft). A limitation in the scope of this overview consists on the availability of the WTO documents as many are restricted.
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interplay of bargaining power and negotiating strategies in how Members work on potential
problems unifying trade and the environment.200
The TBTC and the CTE are interlinked, as environmental issues signalled in the TBTC are often
moved to the CTE for further dialogue. The TBTC consists of a setting for highly technical
exchanges and has some authority, albeit limited, to initiate changes, whereas the CTE has been
qualified as a “convener for discussions” with no real authority201 for it cannot make decisions
and only conveys recommendations back to the TBTC. Together these committees can establish
new rules or guidelines only by reopening and revisiting the TBT Agreement, or through the
TBTC’s Triennial Review process, which is consensus-based.202
3.2.1 TBT Committee
The TBTC was established to ensure a consultation forum203 where Members raise and discuss
trade concerns as well as expose different problems with respect to potential or existing barriers
to trade. Compliance with the transparency obligations requires notifying other Members of any
new technical regulation and informing them of the “products to be covered by the proposed
technical regulation, together with a brief indication of its objective and rationale.”204
Notifications provide several items of information, including the objectives and rationales of the
measure, such as protection of human health or safety, protection of the environment, and
consumer information and labelling.
By notifying their measures, Members provide a “heads-up”205 to others who may comment on
and discuss the proposed technical regulation, 206 or may choose to raise specific trade concerns
200 WTO, World Trade Report—Trade and Public Policies: A Closer Look at Non-Tariff Measures in the 21st Century, (Geneva: WTO, 2012) at 100. 201 UNEP, Trade and Environmental Effects of Ecolabels: Assessment and Response, 2005 at 29 202 Mavroidis & Wijkström, supra note 199. 203 TBT Agreement art 13.1 “consulting on any matters relating to the operation of this Agreement or the furtherance of its objectives, and shall carry out such responsibilities as assigned to it under this Agreement or by the Members”. 204 Article 2.9.2 of the TBT Agreement. 205 Mavroidis & Wijkström, supra note 199. 206 Article 2.9.4 of the TBT Agreement.
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(STCs) for further clarification. STCs provide “the opportunity of consulting on any matters
relating to the operation of the [TBT] Agreement or the furtherance of its objective.”207 At
meetings, Members can raise new STCs or continue discussing previous ones. They permit
signalling that a measure triggers a possible violation of WTO rules or constitutes a serious
impediment to trade. 208
The importance of an open and non-confrontational discussion mechanism in these Committees
lies in the fact that other Members, through the exchange of information, gain a better
understanding of the others’ measures and objectives.
Lang and Scott identify some characteristics of the SPS Committee equally transposable to the
TBTC. They argue that the WTO Committees enable Members to build closer cooperation
between them, leading to trust.209 In other words, the consultation forum is bidirectional: it
enables Members to seek clarity on another Member’s measure and to discuss its purpose and
consistency with the TBT Agreement. It also compels the other member to explain the public
policy reasons underlying the measure. One possible outcome of these exchanges may be that the
regulating Member amends its measures taking into account the concerns raised or that the
Member raising the issue better understands the objectives and mechanism of the measure.210 In
the end, providing additional information to Members may reduce conflicts and avoid recourse to
the dispute settlement mechanism. In fact, Mavroidis et al. note that an increase in STCs can be
juxtaposed to the decline of dispute settlement.211
It reflects the imbalance of power among Members as a smaller or developing country may be
pressured by developed countries to change a measure through these discussions. Developed
countries may easily dismiss developing countries’ objections or concerns related to their
207 Article 13.1 of the TBT Agreement. 208 Mavroidis & Wijkström, supra note 199. 209 Andrew Lang & Joanne Scott, “The Hidden World of WTO Governance” (2009) 20:3 EJIL 575 at 593ff. See also Lukasz Gruszczynski, “The REACH Regulation and the TBT Agreement: The Role of the TBT Committee in Regulatory Processes” in Michael J Trebilcock and Tracey Epps eds, Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013). 210 Lang & Scott, ibid at 593ff. 211 Henrik Horn, Petros C Mavroidis & Erik N Wijkström, “Between Transparency and Adjudication: Environmental Measures in the WTO TBT Committee”, (Stockholm: ENTWINED, 2012) at 12, online: ENTWINED, <http://entwined.ivl.se>.
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measure. In their study, Mavroidis et al. underline how developing countries are indeed actively
using the TBTC and raising concerns related to environmental measures originating in the
United States or the EU.212 They note that measures from the BRIC countries (Brazil, Russia,
India and China) are more often subject to discussions in the TBTC than in the DSB. Very few
formal complaints occur between developing countries and the BRIC.
3.2.1.1 PPMs in the TBTC
In 2012, 253 notifications specified environmental protection as an objective of the measure
(corresponding to 16% of total notifications). While there has been a continuous increase in
environmental protection notifications, this objective lags far behind that of the “protection of
human health or safety”, the first ranking objective for many years (1,023 notifications in
2012).213
Between 1995 and 2012, Members flagged 42 measures that raised nprPPM concerns with a
marked decline on that issue in the past few years.214 Most of the measures pertained either to
food related regulations or to labelling, and only a handful related to environmental
protection.215 To illustrate, concerns have been raised with PPMs related to Halal food
requirements, wine, or cheese production, as well as textiles. Of the 42 STCs, nineteen were
maintained by the EU in comparison with seven by developing countries and four by the BRICS
countries. Between 1995 and 2008, of a total of 258 STCs, 53 pertained to labelling, which
targeted mainly the EU, the USA and China. 216
212 Developing countries target these countries in 80% of the cases. Mavroidis, Horn & Wijkström, ibid at 16. 213 WTO, Committee on Technical Barriers to Trade, Eighteenth Annual Review of the Implementation and Operation of the TBT Agreement, WTO Doc G/TBT/33 at 4 [G/TBT/33]. In 2009, on 1,490 notifications submitted, 274 (18.4 %) were related to the protection of the environment. Compare to 89 notifications on a total of 933 notifications in 1997 (9,5% in 1997 as opposed to 16,3% in 2012). WTO, Committee on Technical Barriers to Trade, Third Annual Review of the Implementation and Operation of the TBT Agreement, WTO Doc G/TBT/6 [G/TBT/6]. It is worth also contextualizing the notifications under the TBT Agreement with all notifications submitted pursuant to all WTO Agreements. From a more macro-level, when looking at all the notification mechanism imposed by all WTO Agreements, a total of 3,321 notifications were submitted in 2009, of which 14.5 % were environment-related (481environment-related notifications). WTO, Committee on Trade and Environment, Environmental Database for 2009, WTO Doc WT/CTE/EDB/9. 214 G/TBT/33 at 7. 215 See for example, WTO Committee on Technical Barriers to Trade, Seventeenth Annual Review of the Implementation and Operation of the TBT Agreement, WTO Doc G/TBT/31 at 7. 216 Shane Baddeley, Peter Cheng & Robert Wolfe, “Trade Policy Implications Of Carbon Labels on Food” Estey (2012) 13:1 Estey Centre Journal of International Law and Trade Policy 59 at 73-74.
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In 2011, Korea stressed that France’s Grenelle Law 2217 imposed mandatory labelling
requirements on products and services whereas countries usually implemented voluntary carbon-
footprint labelling schemes.218 Addressing Korea’s concern, the EU explained that the
mandatory component of carbon labelling was no longer in the final version of the law. 219
Argentina also posed specific questions to clarify inter alia the voluntary status of the
ecolabelling and the methodology used for the carbon footprint. 220 It further indicated its
concern that Grenelle Law 2 implied unnecessary or disproportionate costs and certification
burdens – “prevent[ing] small and medium enterprises (SMEs) and as well as larger companies
in developing countries from getting market access to developed countries.”221 It suggested that
the law caused unfair treatment of “like imported products” from developing countries because
the discrimination was based on PPMs (“environmental impact or the emissions from production
of a good”). Furthermore, that the carbon emission calculation would disadvantage imported
goods because of the additional distribution and transport that EU products would not have to
include in their carbon emission and the cost of certification would be higher for exporting firms
from developing countries.222 Other developing countries supported Argentina’s positions.223
Recalling the historical trading ties between developed and developing countries, South Africa
noted that the distance that exporting products from developing countries must travel to
accentuate the fact that this law creates unnecessary obstacles to market access.224
Grenelle Law 2 demonstrates the crosscutting features of the TBTC and CTE. The legislation has
not yet been notified under the TBT Agreement, which prevents countries from obtaining
clarification on its scope, implementation and application. The fact that Grenelle Law 2 was not
217 Loi n° 2010-788 du 12 juillet 2010 portant engagement national pour l’environnement, JO, 13 July 2010, 12905 [Grenelle Law 2]. See infra Chapter 3, Section 3.2.2.2. 218 WTO, Committee on Technical Barriers to Trade, Minutes of Meeting (held on 15-16 June 2011), WTO Doc G/TBT/M/54 at paras 62-63[G/TBT/M/54]. 219 Ibid at paras 65-66. 220 Ibid at para 64. 221 WTO, Committee on Technical Barriers to Trade, Minutes of Meeting (held on 13-15 June 2012), WTO Doc G/TBT/M/57 at paras 182-183 [G/TBT/M/57]. 222 Ibid. 223 India, South Africa, Cuba, China and Uruguay. Ibid at paras 186 ff and WTO, Committee on Technical Barriers to Trade, Minutes of Meeting (held on 27-28 November 2012), WTO Doc G/TBT/58 at paras 2.110-2.116 [G/TBT/M/58]; and WTO, Committee on Technical Barriers to Trade, Minutes of Meeting (held on 6-7 March 2013), WTO Doc G/TBT/59 [G/TBT/M/59]. 224 France did not consider that its labelling scheme had a significant impact on trade, “since the articles related to products did not comprise criteria as such.” G/TBT/M/54 at paras 65-66.
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implemented as originally planned, namely as a mandatory measure, it would perhaps not fall
within the definition of technical regulations and explains why it has not been notified.225
Members such as India, Argentina, Brazil and China have voiced other concerns: they have
emphasized the absence of international standards that could be used as a basis for the
ecolabelling, the large scope of application (the law applies to all products and services) and the
methodology for computation of carbon footprint.226 For these countries, Grenelle Law 2 would
impose additional costs for companies to ensure French market access and would thus impede it.
For others, Grenelle Law 2 comes into contradiction with special and differentiated treatment
pursuant to Article 12 of the TBT Agreement because it does not provide exceptions for
developing countries whose products have to travel a distance to reach the destination market as
opposed to developed countries.227 Argentina framed Grenelle Law 2 as a discriminatory
measure based on nprPPMs.228
This example exhibits the limited extent to which issues are discussed at the TBTC. With respect
to climate change PPMs, the crux of discussion is reverted to the CTE, although and somewhat
ironically this Committee has even more limited powers to act. As the next section will expose,
PPMs have been more the topic of conversation in the CTE.
3.2.2 Committee on Trade and Environment
The CTE centres on the relationship between trade measures and environmental measures to
promote sustainable development, and recommends modifying WTO provisions. 229 Under the
2001 Doha Declaration,230 the CTE’s task was refined to focus notably on the effect of
environmental measures on market access, and in particular as they affect developing and least-
developed countries, intellectual property and ecolabelling.231 It further established a special
225 This was the EU’s explanation. 226 G/TBT/M/57 at paras 182 – 188; G/TBT/M/58 at paras 2.110 – 2.116; G/TBT/59 at paras 2.118 - 2.120. 227 G/TBT/M/58 at para 2.112 228 G/TBT/M/57 at para 183. 229 The CTE was set up by the 1994 Marrakesh Ministerial Decision on Trade and Environment (Multilateral Trade Negotiations at Marrakesh on 15 April 1994). 230 WTO, Doha WTO Ministerial 2001 (20 November 2001), WTO Doc WT/MIN(01)/DEC/1 [Doha Declaration]. 231 Article 32 of Doha Declaration.
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session forum (CTESS) to examine issues related to multilateral environmental agreements and
the reduction of tariffs and non-tariff barriers related to environmental goods and services.232
While some authors argue that the CTE has not been as proactive and as effective as it could
be,233 others maintain that it acts as “a powerful tool for governments to achieve a coordinated
approach towards trade and environment”.234 In the CTE meeting of 10 July 2009, Members
agreed to integrate in their discussion the linkages between climate change and trade.235 PPMs
necessarily permeate the discussions related to climate change revolving more precisely around
the definition of environmental goods and which criteria should be used to determine
environmental goods and services, market access, and ecolabelling. Recently, discussions have
narrowed to more specific climate change issues such as carbon footprint and border tax
adjustments.
Through a review of some of the discussions, this section will examine how the discussion on
PPMs arises within the CTE and with respect to the discussions on 1) environmental goods, 2)
ecolabelling, and 3) BTAs. It is argued that Members are missing an opportunity to effectively
advance PPM discussions in order to overcome the conventional negative wisdom on the
“protectionist nature of PPMs.” CTE could serve as an open platform to spur innovative and
productive dialogue to proactively target the linkage between trade and environment and how
countries, and particularly developing countries, can develop comparative advantages with
PPMs.
3.2.2.1 Environmental Goods
Pursuant to Article 31 of the Doha Declaration, the CTESS must “negotiate on the reduction or,
as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services”.
232 Article 31 of Doha Declaration. 233 See Melissa Gabler, “Norms, Institutions and Social Learning: An Explanation for Weak Policy Integration in the WTO’s Committee on Trade and Environment” (2010) 2 Global Environmental Politics 80. She argues that the CTE and CTESS are not appropriate fora to achieve outcome of discussions of important incompatibilities and “decrease institutional capacity for learning and integration”. 234 Manuel A J Teehankee, Ingrid Jegou & Rafael J Rodrigues, Multilateral Negotiations at the Intersection of Trade and Climate Change. An Overview of Developing Countries’ Priorities in UNCSD, UNFCCC and WTO Processes (Geneva: ICTSD, 2012) at 35 [Teehankee et al]. 235 Environmental goods should be identied on the basis of the processes (PPMs) or their end-uses. Teehankee et al, ibid.
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An extended analysis of the environmental goods debates is beyond the scope of this section;
rather its focus will be confined to the debates pertaining to PPMs.236 Defining environmental
goods (EGs) and their coverage has long been the subject of heated discussions in the
CTE/CTESS.
Members have put forward different approaches to define EGs. The OECD and the APEC lists
and definition237 were used as starting points but four different approaches rapidly emerged: the
most prevalent and accepted, the list approach, enumerates the specific environmental goods
based on the Harmonized System codes. There are essentially two branches in this approach: one
favours a more traditional definition of environmental goods and the other broadens it to include
“environmentally preferable products” (EPPs), namely products deemed to cause less harm to
the environment and have a direct impact on consumers’ preference, such as renewable
energy.238 In general, developing countries object to the list-based approach on the grounds that
it would enlarge the already existing gulf between developed and developing countries and
would ultimately further privilege products from developed countries.239 They have also shied
away from supporting EPPs based on PPMs due to the problematic issues raised by PPMs.
Many developing countries have however submitted alternatives, three of which have emerged
as leading positions.240
In 2007, Brazil proposed that environmental goods include ethanol and biodiesel as well as other
clean technologies. It advocated that biofuels were environmental goods.241 Given the nature of
biodiesel this was perceived as contentious: is biofuel an environmental good? On the one hand,
biofuels reduce GHG emissions either through their production or their use, and some crops do
not ravage lands and soils (jatropha is more sustainable than corn which entails intensive
236 For for an elaborate discussion on EGs and EPPs, see Robert Howse & Petrus B van Bork, Options for Liberalising Trade in Environmental Goods in the Doha Round (Geneva: ICTSD, 2006). 237 In addition to a list of 164 environmental products, the OECD defines environmental goods and services industry as activities which produce goods and services to measure, prevent, limit, minimise or correct environmental dam-age to water, air and soil, as well as problems related to waste, noise and eco-systems. These include cleaner technologies, products and services that reduce environmental risk and minimise pollution and resource use. 238 This approach is based on the United Nations Conference on Trade and Development definition of EPPs. Howse & van Bork, supra note 236 at 1-2. 239 Teehankee et al, supra note 234 at 37 240 Ibid and see also Howse and van Bork, supra note 236. 241 WTO, JOB(07)/146 (Brazil, 1 October 2007) (restricted document).
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cultivation). On the other hand, some biodiesels are heavy producers of nitrogen oxide, water-
intensive or may impoverish the soil.242 Considering their dual nature, biofuels cannot fall within
the category of environmental goods but are considered EPPs. Determining precisely whether
biofuels are environmental goods would necessitate further inquiry onto their PPMs and life
cycle.
The EPPs have prompted discussions involving PPMs, in terms of the criteria on which to rely to
identify such goods. The opposition to the use of PPMs as a basis to classify environmental
goods has moved beyond a simple North-South divide as a large number of countries object to
the use of PPMs.243 Developing countries have generally reiterated their strong concerns that
PPMs could be used to distort trade and reduce developing countries’ comparative advantage in
goods stemming from natural resources.244 For example, China views it as “inappropriate to use
clean technology as a basis for the identification of environmental goods”245 – a position far
from surprising given that China’s manufacturing economy is driven by coal and other fossil fuel
energy sources. For China, PPMs and clean technology are subjective concepts that change
constantly because of rapid technological progress and are defined differently from one country
to another depending on their state of economic development.246 Contrasting with the usual
emphasis on the negative impacts of PPMs, Chile posited a different outlook on PPMs by
reinforcing the positive effect that PPMs may have and that they should be part of market gains
that countries seek.247
3.2.2.2 Ecolabelling
Ecolabelling engages the thorny issue of whether products can be seen as different based on their
242 Fahmida Khatun, Can Biofuels be Considered as Environmental Goods (Geneva: ICTSD, November 2009). 243 For example, USA, Canada, China, Brazil, India, New Zealand, Argentina Hong Kong, Singapore, Australia, and Indonesia. Conversely, the EU and Switzerland have continued to demonstrate openness in that regard. 244 For Ecuador’s position, see WTO, Committee on Trade and Environment Special Session, Summary Report of the Twelth Meeting of the Committee on Trade and Environment Special Session (held on 7-8 July 2005), WTO, Doc TN/TE/R/12 at para 100. 245 WTO, Committee on Trade and Environment Special Session, Summary Report of the Eighth Meeting of the Committee on Trade and Environment Special Session (held on 19 April 2004), WTO, Doc TN/TE/R/8 at para 33. 246 Ibid. 247 WTO, Committee on Trade and Environment Special Session, Summary Report of the Twenty-First Meeting of the Committee on Trade and Environment Special Session (held on 1-2 November 2007), WTO, Doc TN/TE/R/21 at para 69.
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different environmental impacts and PPMs. The previous section showed how labelling has been
flagged numerously through the notification mechanism of the TBT Agreement. As this section
will outline, discussions of ecolabelling have moved in recent years from a general to a more
focused debate on carbon footprint. Having started with voluntary and mandatory labels and how
these came under TBT rules, Members approach ecolabelling as a more economic issue
intrinsically undissociable from market access.248 As indicated earlier, Vranes considers this
issue to be one of the most discussed in the CTE.249
Ecolabelling has been at the heart of debates since the beginning of the CTE. Early discussion of
ecolabelling emphasized a rift between developed and developing countries: the latter asserted
that ecolabelling triggered significant market access problems for them.250 Discussions have
taken place under both the market access item and the labelling item of the CTE work
programme.
Within the discussion on market access, developing countries have continued to express their
concerns that the proliferation of private standards poses obstacles to many of their producers
and exporters.251 For China, a strong opponent of PPMs, they represent “serious challenges to
developing countries' exports” since they target trade interests of developing countries and not of
developed countries252 who impose their PPM measures. Argentina has steadfastly argued that
standards were predominantly voluntary but in practice could become obligatory and thereby
limit market access for developing-country exports. This position has been supported by many
countries such as Saudi Arabia, Colombia, Turkey, and India.253
Some countries, such as Korea, acknowledge that well-designed ecolabelling measures can be
248 This observation is based on review of my review of CTE Minutes and confirmed by the EU in WTO, Committee on Trade and Environment, Report of Meeting (held on 6 July 2005), WTO Doc WT/CTE/M/40 at para 53. 249 Vranes, “Ecolabelling”, supra note 111 at 213. 250 See for example Argentina in WTO, Committee on Techincal Barriers to Trade, Background Note by the Secretariat, Technical Barriers to the Market Access of Developing Countries, WTO Doc WT/CTE/W/101-G/TBT/W/103; Saudi Arabia in WTO, Committee on Trade and Environment, Report of Meeting (held on 21 March 2002), WTO Doc WT/CTE/M/29 at para 66. 251 See WTO, Committee on Trade and Environment, Report of Meeting (held on 10 July 2009), WTO Doc WT/CTE/M/47 at paras 28-29 (Thailand) and at para 55 (Argentina). 252 WTO, Committee on Trade and Environment, Report of Meeting (held on 2 May 2007), WTO Doc WT/CTE/M/44 at paras 28-29. 253 WTO, Committee on Trade and Environment, Report of Meeting (held on 20 November 2009), WTO Doc WT/CTE/M/48.
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effective instruments of environmental policy, but, if not conceived suitably, can be used as
protectionist tools and non-tariff barriers to trade.254 Several countries have submitted papers on
labelling and the linkage with PPMs.255 Developing countries in general have shown steady
reluctance if not outright opposition to considering nprPPMs in ecolabelling. They claim that
they restrict market access to developed countries, and that complying with such schemes entails
significant costs, information requirements, and technical expertise that many developing
countries and producers in these countries do not have.
Members have incorporated the more specific notion of carbon footprint to their discussions on
ecolabelling. In 2011, members shared information on their national policies. Chile presented a
study on carbon footprint pertaining to food products.256 The EU informed the CTE on the
development of methodologies for life-cycle assessment.257 For developing countries, the carbon
footprint issue, whether mandatory or voluntary, constitutes an implementation of non-tariff
barriers and a form of disguised protectionism.258 While there may exist no clear developed and
developing countries divided, there is nonetheless a strong propensity among developing
countries, as illuminated above, to approach ecolabelling and carbon footprint with a certain
degree of aversion whereas the EU and other countries like Switzerland take a more proactive
stand on the issue.
3.2.2.3 BTAs
The issue of carbon border tax adjustments (BTAs) was discussed in the early days of the CTE
between 1994 and 1996 but was only raised again recently in 2011. It represents a highly
254 WTO, Committee on Trade and Environment, Report of Meeting (held on 18-19 February 1999), WTO Doc WT/CTE/M/20 at para 23. 255 For example, see WTO, Committee on Trade and Environment, Marking and Labelling Requirements (Switzerland) (19 June 2001) WTO Doc WT/CTE/W/192 and G/TBT/W/162; in 2002, Canada introduced its paper, see WTO, Committee on Technical Barriers to Trade, Labelling and Requirements of the Agreement on Technical Barriers to Trade: Framework for informal, structured discussions (12 March 2002), WTO Doc G/TBT/W/174; followed by the WTO, Committee on Trade and Environment, Labelling for Environmental Purposes, Submission by the European Communities under Paragraph 32(iii) (6 March 2003), WTO Doc WT/CTE/W/225. 256 WTO, Committee on Trade and Environment, Carbon Footprint: a Tool for the Improvement of Climate Competitiveness of Chilean Exports in WT/CTE/M/52 at para 4. 257 See WTO, Committee on Trade and Environment, Minutes of Meeting (held on 14 November 2011), WTO Doc WT/CTE/M/53. 258 Position shared by Saudi Arabia and India. See WTO, Committee on Trade and Environment, Report of the Meeting (held on 17 February 2010), WTO Doc WT/CTE/M/49 at para 9-10; WTO, Committee on Trade and Environment, Report of the Meeting (held on 29 September 2010), WTO Doc WT/CTE/M/50.
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sensitive issue as it entails important economic implications and there is a heated debate, among
scholars and experts, on whether they are WTO consistent. The discussions at the CTE have
shown political willingness to address BTAs.259
In a 2011 document expressly pertaining to carbon-related BTAs,260 Singapore recognized that
countries may choose to implement BTAs “to address competitiveness and leakage issues that
may result from the use of a carbon price mechanism.” 261 It further underlined the uncertainty
that BTAs on imports would comply with WTO rules, especially if the BTAs are based on PPMs
(emissions during production).262 The discussions that ensued among Members remained
preliminary, as many countries (especially developed countries) did not advance any detailed
positions. Nevertheless, it presages the need for substantive further discussion on BTAs and
related issues. Many countries questioned whether the CTE was the appropriate forum to discuss
BTAs.263
In particular, China voiced its position that BTAs, contrary to the view Singapore had expressed,
were inconsistent with WTO rules, especially Articles I and III of the GATT, and could not be
justified under Article XX of the GATT because they were protectionist.264 India raised concerns
related to the unilateralism of BTAs, which could trigger “tit for tat” trade restrictions and
retaliation, and to the effect that “WTO inconsistent trade measures” diminish development
prospects for developing countries. It further alluded to the fact that a debate on BTAs to combat
climate change would deviate from the “need to fight global warming and to conclude a treaty on
climate change.”265 Brazil noted that no consensus existed on the consistency of BTAs with
WTO rules and that therefore BTAs should not be considered an “instrument available to address
259 Teehankee et al, supra note 234 at 36 260 WTO, Committee on Trade and Environment, Promoting Mutual Supportiveness between Trade and Climate Change Mitigation Actions: Carbon-Related Border Tax Adjustments (Communication by Singapore) (30 March 2011), WTO Doc WT/CTE/W/248 and discussed in WTO, Committee on Trade and Environment, Report of Meeting (held on 6 July 2011), WTO Doc WT/CTE/M/52 [WT/CTE/M/52]. 261 WT/CTE/W/248 at para 5. 262 Ibid at para 6. 263 For example, According to Saudi Arabia, climate change was not a trade issue and should only be discussed in the appropriate forum namely under the aegis of the UNFCCC. Japan also noted that BTAs should be discussed under the UNFCCC. See WT/CTE/M/52 at para 56. 264 Ibid at para 55. 265 Ibid at paras 61-66.
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carbon leakage.” 266
Developed countries held less firm views on climate change and BTAs and did not express
detailed views on the issue at such an early stage. Many countries however agreed on the linkage
between trade and climate change and welcomed the opportunity to further discuss BTAs in the
CTE. BTAs will likely occupy an important place in future discussions.
3.3 Conclusion
In summary, this chapter has outlined PPM issues within both the WTO legal and political
frameworks. The first section emphasized the coverage of PPMs under the GATT and TBT
Agreement despite the fact that the jurisprudential tendency leans more to directly avoiding
addressing PPMs writ large. By nature PPMs are more akin to the contextual approach than an
analysis relying on cross-price elasticity. Tribunals will likely be confronted with climate change
PPM measures in the near future and will need to address this problematic head-on. It has been
argued that given the indications from the Trilogy findings, the contextual approach (regulatory
purpose) would open a door to PPMs.
In contrast to the dispute settlement mechanism, Members have used the CTE and TBTC to
actively engage in discussions of PPMs at a broader level and also as they relate to climate
change. However, given the Committees’ limited capacity to act, the discussions have not
permitted too much progress in resolving the PPM issues. Indeed, countries seem to discuss
PPMs ad nauseam under different items, but their positions have not changed. The strength of
these Committees lies in the space for dialogue enabling Members to work through and raise
concerns by encouraging active participation. Discussions are somewhat limited by the capacity
of these Committees to take actions. Thus until now, there have been few concrete results.267
266 Ibid at para 75. 267 Richard Tarasofsky, “The WTO Committee on Trade and Environment: It It Making a Difference” (1999) 3 Max Planck UNYB 471 at 484.
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Three Case Studies 4This section will provide three case studies of climate-change PPM measures that have either
been proposed or implemented. The selected measures are presented in a decrescendo: from a
“hard” measure addressing climate change policies to a “softer” one.
The hard measure is deemed to have the most impact in terms of GHG reduction: the carbon tax.
A recent carbon tax proposal in the United States garnered significant support from all sides.268
Although the draft must overcome many obstacles before it is implemented, it nevertheless
presents an interesting case study because it involves a carbon tax and a BTA on PPMs. The
regulatory measure presented as the second case study may not have as strong of an impact on
climate change as a carbon tax, but it offers more flexibility and it has actually been
implemented. In 2009, the EU adopted directives to reduce GHG emissions in transportation by
encouraging the use of sustainable biofuel. Since the EU imports a significant share of its
biofuel, the consistency with WTO norms is essential. The third measure is considered the softest
but at the same time, it is the easiest to implement and therefore is the most widespread:
ecolabelling. Many countries, both developed and developing, have ecolabelling regimes, either
mandatory or not. France has designed an ecolabelling scheme that was intended to be
mandatory but was first put in place as a pilot project for a selected group of products. Each
analysis will examine different sets of the WTO rules in relation to the climate change PPM
measures.
4.1 US Proposal of a Carbon Tax
4.1.1 Overview of Carbon taxes
The economic theory of environmental taxation dates back to the work of Pigou who promoted
the idea of internalizing external environmental damages through taxation.269 A Pigovian
268 It remains to be seen how the proposal will evolve in light of the Obama’s Action Plan to combat climate change, lauched in June 2013; online: White House < http://www.whitehouse.gov/sites/default/files/image/president27sclimateactionplan.pdf> 269 Arthur Cecil Pigou, The Economics of Welfare (Macmillan: London, 1920).
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environmental tax can be perceived as reflecting the “polluter pays principle,” which is also the
principle that Stiglitz espouses, arguing that not pricing the global external costs of carbon
emissions is a de facto domestic subsidy.270 In an ideal world free of vested interests, industry
lobbying, enforcement problems and political costs, a carbon tax would apply globally271 to all
products and services that generate climate externalities.272 Such a tax would reduce the number
of loopholes from carbon leakages and would not require the implementation of border tax
adjustments to address competitiveness imbalance. However, our world is not ideal, and faced
with a paralysis of global action to address climate change, countries act unilaterally to reduce
GHG emissions.
This section will explore a specific carbon tax regime and related BTA pertaining to imports273
and its compatibility with WTO rules. After a brief discussion of two underlying reasons to
impose a BTA, namely carbon leakage and loss of competitiveness, it will analyse the most
recent US carbon tax proposal designed in the Climate Protection Act of 2013 and assess
whether it, as currently drafted, would be consistent with WTO rules reviewed in the previous
section.
Countries implementing regimes aimed at reducing GHG emissions have generally opted for
either a carbon tax or a cap-and-trade emission system, both of which set a price for emissions.
While some economists and experts favour a carbon tax as a more efficient method than a cap-
and-trade system,274 others believe the latter can be designed to be as efficient. Most politicians
have tended to favour the cap and trade systems for a multitude of reasons and partly because it
is not another tax, which can become a political faux pas. Consider Australia’s announcement in
270 Joseph Stiglitz, “A New Agenda for Global Warming” (2006) 3:7 The Economists’ Voice 1; Helm, supra note 54 at 193. 271 Ibid. 272 Gilbert E Metcalf and David Weisbach, “The Design of a Carbon Tax” (2009) 33 Harv Envtl L Rev 500 at 521. 273 BTAs on exports fall within Articles VI:4 and Ad Article XVI of GATT as well as the Subsidies and Countervailing Measures Agreement which are not part of the scope of this paper. For more analysis on this issue, see Hufbauer et al, supra note 140. 274 See for example N Gregory Mankiw, “One Answer to Global Warming: A New Tax” New York Times (16 September 2007). Harvard economist, the author was a senior adviser to President George W. Bush and to Mitt Romney.
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July 2013 to replace a year earlier than planned its carbon tax by a carbon trading system to
assuage the numerous complaints over higher costs of living and loss of competitiveness.275
Helm privileges a carbon tax because, in part, “it can be set much further into the future”276 and
it must aim at changing the demand and supply of energy goods, which links it to the externality.
He argues that consumption drives the level of carbon footprint and thus a carbon tax should
target consumption and not production.277
A carbon tax entails charging a fixed price on each ton of carbon, which in turn allows
internalizing consumption and production externalities of environmental costs, two sides of the
same coin. According to Metcalf and Weisbach, the optimal tax rate in a fixed price carbon tax
regime is where the rate is such that the marginal benefit of abatement equals the marginal cost
of abatement.278 As a market response to curb GHG emissions, a carbon tax sends a strong
signal to polluters that they will pay for the pollution they produce and to consumers of the cost
of carbon intensive goods and services.
4.1.2 Leakage and Loss of Competitiveness
Both cap-and-trade and carbon tax schemes present a duo of interconnected risks: an economic
risk (loss of competitiveness) and an environmental risk (carbon leakage). A central objection to
carbon tax – other than the negative political connotation that the word “tax” may have – is the
belief that unilateral carbon taxes would harm domestic competitiveness279 and eventually
overburden consumers with higher prices. By imposing higher production costs or carbon taxes
for environmental purposes, industries will bear higher costs, eventually passed down to
consumers, and create incentives to reduce GHG emissions. However, the consequences may
also translate into a loss of international market shares to competitors not subject to these
275 “Australian Carbon Tax in Limbo as Election Fever Escalates”, (2013) 27:17 Bridges Weekly Trade News Digest, online Carbon Tax in Limbo as Election Fever Escalates”, (2013) 27:17 Bridges Weekly Trade News Digest, online: ICTSD <http://ictsd.org>. 276 Helm, supra note 54 at 182. 277 Ibid at 189. 278 Metcalf and Weisbach, supra note 272 at 511. 279 Stefan Speck, “The Design of Carbon and Broad-based Energy Taxes in European Countries” (2008) 10 Vermont J Envtl L at 42.
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environmental costs. Loss of competitiveness can also result in detrimental effects domestically,
such as loss of jobs.280
From an environmental perspective, carbon taxes may engender carbon leakage. Carbon leakage
is defined as “the increase in CO2 outside the countries taking domestic mitigation action divided
by the reduction in the emissions of these countries.”281 A carbon tax applied in many countries
or the same tax rate imposed throughout the world would seriously diminish the leakage
problem.282Reinaud frames the loss of competitiveness in two segments: production leakage
where products are exported from other countries with more relaxed climate legislation and
investment leakage, where production industries relocate.283
BTAs are often considered to be an effective instrument to alleviate the economic impact of a
carbon tax by preventing harm to competitiveness and reducing carbon leakage. They can help
relieve concerns about the economic impact of a carbon tax; in fact they have generally been
used for economic rather than environmental reasons.284 A BTA works as a complementary
mechanism to either a carbon tax or a cap-and-trade system: it charges the imported product (or
exported product) the same amount domestic products are charged. From an economic
perspective, they rectify market distortions but at the same time confine trade to certain products
and producers.285 Many experts and renowned economists, like Stiglitz and Helm, support the
use of border tax adjustments as a “fairer way of distributing the costs.”286
At first glimpse, considering the objective of a BTA to redress market conditions to maintain
competitiveness among economic participants at the same level, it seems to reflect the spirit of
280 Julia Reinaud, “Would Unilateral Border Adjustment Measures be Effective in Preventing Carbon Leakage” in Climate and Trade Policies in a Post-2012 World, (Geneva: UNEP, 2009) 71 at 76-77, online: UNEP < http://www.unep.org > [Reinaud, “Carbon Leakage"]. 281 IPCC, Climate Change 2007: Mitigation: Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (Cambridge University Press, Cambridge, 2007). 282 Nicole A Mathys and Jaime de Melo, “Political Economy Aspects of Climate Change Efforts” (2011) The World Economy 1938 at 1940. 283 Reinaud, “Carbon Leakage”, supra note 280 at 72. 284 Susanne Dröge et al, “National climate change policies and WTO law: a case study of Germany’s new policies” (2004) 3:2 World Trade Review 161 at 176. 285 Dieter Helm, Cameron Hepburn & Giovanni Ruta, “Trade, climate Change and the political game theory of border carbon adjustments” (2012) Centre for Climate Change Economics and Policy, Working Paper no 92 at 5. 286 Helm, supra note 54 at 193; see also Stiglitz, supra note 270.
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the nondiscrimination principle aimed at ensuring that competitive conditions in the market are
not detrimental to foreign products or producers. BTAs give countries the opportunity to move
decisively on carbon pricing while protecting industry and preventing carbon leakage. Some
commentators have questioned the feasibility of BTAs because of their high costs, the difficulty
in administering them287 and their actual effectiveness in preventing the relocation of
industries.288 They can also serve protectionist objectives. Or they combine all of these
functions.289 Horn and Mavroidis underline that it could be naïve to think that BTAs would not
become schemes of protectionism, since any form of “level playing field” is a form of positive
protectionism.290 By intervening to reset the competition conditions at equal levels for all market
participants, the government treats one group in a more favourable manner to level competition.
Echoing this cynical realism, Helm opines nonetheless that “countries with an enthusiasm for
protectionism may use the environment as an excuse; the absence of a carbon price remains a
distortion whatever the motive.”291 It is this looming disguised protectionism that provokes
consternation among developing countries. In fact, India declared that it would bring a WTO
challenge against any BTA that developed countries impose on Indian imports.292
4.1.3 US Carbon Tax Proposal
Under President Obama administration, several climate change initiatives proposed a cap-and-
trade system, for example the American Clean Energy and Security Act 2009,293 which also
included a border tax adjustment mechanism.294 Carbon taxes are often demonized by
politicians, yet an interesting shift is occurring with prominent US experts and politicians voicing
their support in favour of a carbon tax. Since January 2013, two carbon tax proposals have been
287 Fisher & Fox, supra note 41 and Rafael Leal-Arcas, Climate Change and International Trade (Cheltenham: Edward Elgar, 2013) 512 at 135-136. 288 Reinaud, “Carbon Leakage”, supra note 280 76. 289 Horn and Mavroidis, “BTA”, supra note 71 at 1924. 290 Ibid. 291 Helm, supra note 54 at 191. 292 “India Threatens WTO Case Against Proposed ‘Carbon Border Taxes’” (2010) 14:12 Bridges Weekly Trade News Digest, online: ICTSD <http://ictsd.org>. 293 American Clean Energy and Security Act 2009, HR 2454, 111th Congress (2009). 294 For a detailed analysis of its consistency with WTO rules, see Veel, supra note 80.
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put forward by Senators: the Climate Protection Act of 2013295 (CPA) and the Carbon Pollution
Fee.296 This sudden political carbon tax “enthusiasm” can well be explained by the potential
revenues a carbon tax would generate and thus the opportunity to mitigate the fiscal difficulties
and indebtedness that the country has been experiencing.297
The CPA contains two essential elements that make it particularly interesting for this thesis: first,
it would put in place a border tax adjustment for all imported products that are considered carbon
intensive and second, in determining the BTA fee, the CPA expressly mentions GHG outputs.
These two elements will be addressed in greater detail below. It is worth noting that a similar
carbon equivalency fee was first introduced in the US Cap and Dividend Act of 2009,298 but the
legislative proposal garnered little support and died early on in committee.
The CPA’s objective is environmental in nature: it aims to “address climate disruptions, reduce
carbon pollution, enhance the use of clean energy, and promote resilience in the infrastructure of
the United States”.299 It proposes the imposition of a carbon fee (a carbon tax) and a carbon
equivalency fee (other semantics for a BTA). It would be considered revenue neutral since all the
revenue would be remitted to society in different ways; for instance, through monthly rebates to
American citizens and residents and through a Pollution Reduction Trust that would allocate $7.5
billion annually over ten years to mitigate the impacts of the tax on energy intensive-trade
exposed industries.
295 The CPA was introduced by Senators Bernie Sanders (I-Vt) and Barbara Boxer (D-CA). US, Bill S, Climate Protection Act of 2013 (proposal), 113th Cong, 2013, online: Senate <http://www.sanders.senate.gov/imo/media/doc/0121413-ClimateProtectionAct.pdf>. 296 Introduced by Henry A. Waxman, Senator Sheldon Whitehouse, Representative Earl Blumenauer, and Senator Brian Schatz on March 12, 2013. US, Bill S, (proposal), 113th Cong, online: Whitehouse Senate: <www.whitehouse.senate.gov/download/?id=17727510-aaba-44c5-821c-ca3499bfd999>. At the time of writing, the proposal is too much in a draft state to determine whether border tax adjustment would be included. According to Section 3 of the proposed draft, March 12, 2013, it would seem that it covers without any distinction as to the origin the owners and operators of facilities, as well as the suppliers of products required to report emissions. 297 See William G Gale, Samuel Brown & Fernando Saltiel, “Carbon Taxes as Part of the Fiscal Solution” (2013) Brookings Institute, online: Brookings Institute: < http://www.brookings.edu>; Joseph Aldy & Robert N Stavins, “Using the Market to Adress Climate Change: Insights from Theory and Experience” (2011) NBER Working Paper 17488. 298 Cap and Trade Dividend Act of 2009, HR 1862 (111th Cong) 2009-2010. 299 Recital of CPA.
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The carbon fee applies to “carbon polluting substances,” defined as coal, petroleum and natural
gas (methane).300 Any manufacturer, producer or importer of these products must incur the
carbon fee based on CO2 content starting at $20/ton and increasing by 5.6% each year, with a cap
of $35/ton as of the 12th year of implementation.301 It is imposed on the product (as opposed to
the producer). The CPA expressly restricts the carbon fee in three specific cases: where the
carbon polluting substance is employed as feedstock, which to a certain extent prevents the
emission of the carbon polluting substance; when a fee was already paid with respect to another
carbon polluting substance; and in cases of export of the carbon polluting substance.302
Under section 197, a “carbon equivalency fee” is imposed on imports of carbon intensive
products, defined as iron, steel, aluminum, cement, glass, pulp, paper, chemicals or an industrial
ceramic, as well as any other goods whose production is deemed to have similar carbon
intensity.303 Its amount determined annually would be differentiated by the classes of products
and the country of origin “taking into account the quantity of greenhouse gas emissions released
during the process of manufacturing the carbon pollution-intensive goods” as well the
transportation from the country of origin.304 The carbon equivalency fee expires when exporting
countries adopt equivalent carbon tax measures: either through unilateral “substantial equivalent
measures” or through the “adoption and ratification of an international agreement requiring
countries that emit greenhouse gases and produce carbon pollution-intensive goods for
international markets to adopt equivalent measures”, or when the administrator of the
Environment Protection Agency considers it is no longer appropriate. 305 Furthermore, the CPA
provides for a petitioning process allowing for the adjustment of the fee.306
4.1.3.1 The Carbon Fee and its WTO Consistency
The first question to examine is whether the carbon fee is considered a fiscal measure with
regard to WTO rules (and thus whether it falls within Article III:2. If it is a fiscal measure, then
300 Section 195 (1) of CPA. 301 Sections 196(a) and (b) of CPA. 302 Section 196(d) of CPA. 303 Section 195(2) of CPA provides a definition of “carbon pollution intensive goods”. 304 Section 197(2) of CPA. 305 Section 198 of CPA. 306 Ibid.
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the second step will be to determine whether it is applied non-discriminatorily. Given that the
CPA is a draft and has not been implemented, the following analysis is hypothetical.
Article III:2 covers internal taxes or other internal charges of any kind. In Argentina-Hide and
Leather, the Panel, referring to the ordinary meaning of the word “charge,” held that the term
consisted in, inter alia, a “pecuniary burden” and a “liability to pay money laid on a
person…”307 In China-Auto Parts, the AB considered that an important element in determining
whether a charge is an internal charge is whether the obligation to pay this charge is “triggered
by an internal factor, something that takes place within the customs territory.”308 It thus follows
that the carbon fee would be considered an internal charge pursuant to Article III:2 since it
comes into effect because of internal sale or distribution within the United States and not because
the products are imported. Furthermore, the fact that revenue is remitted to society would support
the finding of a fiscal measure.
The carbon fee must therefore comply with the non-discrimination tenet of Article III:2 and
apply to both imported and domestic producers in such a way that, for example, imported natural
gas cannot be treated less favourably than like domestic natural gas. As currently drafted, the
carbon fee applies equally to imported and domestic coal, petroleum and natural gas. Given that
the fixed cost covers all producers, manufacturers and importers, and in the absence of any tax
differentiation between domestic and imported petroleum, coal or natural gas, the carbon fee
would likely comply with Article III:2.
4.1.3.2 The Carbon Equivalency Fee and its WTO Consistency
The carbon equivalency fee could raise a number of challenges under WTO rules. This analysis
will ascertain whether the carbon equivalency fee can be consistent with Article III:2 and if not
whether it can be saved by one of the exemptions within the scope of Article XX.
Under the CPA, the carbon equivalency fee applies to all imported carbon pollution-intensive
goods, such as cement or aluminum. The fee would be equal to the dollar value amount that
domestic producers of comparable carbon pollution-intensive goods have to pay because of the
307 Argentina – Measures Affecting the Export of Bovine Hides and the Import of Finished Leather (Complaint by European Commission) (2000), WTO Doc WT/DS155/R at para 11.143 (Panel Report). 308 China-Auto Parts at para 163. See also Pauwelyn, “BTA”, supra note 80.
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carbon fee imposed on the raw material (petroleum, natural gas and coal) and any carbon
equivalency paid by importers for carbon-intensive goods used in the production of the final
manufactured good.309 The following analysis relied on the assumption set out in Chapter 2 that
while there is uncertainty as to whether BTAs on inputs fall within the scope of Article III:2,
they likely will.
The adjustment mechanism to determine the fee comprises elements that may raise objections
from an international trade perspective. The CPA determines the carbon equivalency fee based
on i) the different classes of products; ii) the country of origin; and iii) the quantity of
greenhouse gas emissions released during the manufacturing and transportation of the good.
At the outset, the reference to a distinction by classes of products would require further
clarification. Second, and probably the most contentious issue, the carbon equivalency fee is not
country-neutral. This distinction based on the origin of the product is clearly in violation of the
non-discrimination norm under the most-favoured-nation (MFN) principle, Article I:1 of the
GATT. Under the MFN principle, aluminum from China cannot be treated differently by being
subject to a higher carbon equivalency fee than aluminum from Canada or Brazil. In Canada-
Autos, the AB held that the purpose of the MFN obligation consisted in preventing
discrimination among like products originating in or destined for different countries.310
To be consistent with Article III:2, the equivalency fee on imported cement or aluminum cannot
exceed internal taxes or internal charges applied to domestic cement or aluminum. The first step
requires assessing whether the domestic carbon-intensive goods are like the imported ones. The
second hurdle presented by the wording consists in the fact that the carbon equivalency fee
“would take into account the quantity of GHGs released during the process of manufacturing” of
the product, such as aluminum. This consists of a tax on the GHG emissions, not on the product
309 In fact the language is very similar to the carbon equivalency fee under the Cap and Dividend Act 2009:
(a) Imports- The Secretary shall impose carbon equivalency fees to be collected by the Commissioner responsible for U.S. Customs and Border Control on imports of carbon-intensive goods. The amount of the carbon equivalency fee shall be equal to the cost that domestic producers of a comparable carbon-intensive good incur as a result of-- (1) prices paid in the acquisition of carbon permits by covered entities under this subtitle; and (2) carbon equivalency fees paid by importers of carbon-intensive goods used in the production of the comparable carbon-intensive good.
310 Canada – Certain Measures Affecting the Automobile Industry (Complaint by the Japan and European Communities) (2002), WTO Doc WT/DS139/R at para 84 (Panel Report).
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per se.311 The CPA provides no details as to what benchmark would be used or how GHG
emissions on imported products would be computed. Would the national US baseline of GHGs
for a given product be used or the best available technology?312 This is a challenging issue
because of the difficulty of monitoring input313 and because calculating the carbon level without
being discriminatory could entail weaknesses in the scheme. For instance, countries may have
different thresholds in capacity plants for different sectors of energy, which makes it complicated
to set out a threshold covering the targeted plants.314 Indeed as Fisher and Fox point out, “from
an economic perspective, one would want to discriminate against more emissions-intensive
imports.”315 Would each exporter need to provide the specific GHG emission for the product?
Determining GHG emissions during the process requires information about the production
technology, which may rely on different sources of energy. This information may prove to be
very difficult to obtain especially in countries with insufficient technology or monitoring
capacities.
The thorny question is whether aluminum from Canada produced with hydroelectricity as
opposed to coal such as, say, aluminum from China, would be considered like. The likeness
assessment requires looking at the nature and extent of competitive conditions. Is there a market-
based difference between clean aluminum and dirty aluminum? Arguably the two products
would be substitutable for one another, although it may be worth mentioning that the
substitutability may become more tenuous depending on the final product in which the aluminum
is incorporated. For instance, it may have less importance for aluminum used in cables but more
importance for Leadership in Energy and Environmental Design (LEED) buildings or cars. As
Pauwelyn highlights, it would seem contradictory that a country may adopt a BTA measure to re-
balance the competitiveness of its industry and later pretend that the products are not in
competition.316 This assessment also entails the consumers’ perspective. Furthermore, the
311Recall that Pauwelyn maintains that According to Pauwelyn, the important issue is the existence of a close “nexus” between the tax and the products to allow adjustment. See Pauwelyn, “BTA”, supra note 80 312 Roland Ismer and Karsten Neuhoff, “Border tax adjustment: a feasible way to support stringent emission trading” (2007) 24 Eur J Law Econ 137. 313 Julia Reinaud, Issues behind Competitiveness and Carbon Leakage, IEA Information Paper, IEA/OECD, Paris, 2008. 314 Reinaud, “Carbon Leakage”, supra note 283 315 Fisher & Fox, supra note 287 at 5. 316 Pauwelyn, “BTA”, supra note 80 at 38-39.
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analysis would also need to evaluate whether the products listed as carbon-intensive under the
CPA are produced in the United States with carbon polluting substances. In the event that final
products in the United States are produced by hydroelectricity or other energy not considered
carbon-polluting substance, the CPA may be found to be discriminatory.
4.1.3.3 Expiry of Carbon Equivalency Fee
Under section 197(2)(c), the CPA identifies two cases where an exporting country would be
“exempt” from a carbon equivalency fee: if it is party to an international agreement with GHG
reduction commitments; and if the exporting country has taken national actions equivalent to
those under the CPA.
The first criterion for expiry is often considered to be a leverage point to encourage other
countries to implement policies to reduce GHG emissions.317 Indeed, this section may have been
drafted to incentivize China to take serious action to reduce GHG emissions. On its face, this
provision would be found in violation of the MFN principle since it discriminates among
countries, but as will be discussed below, it may be saved under Article XX.
Further clarification would be required; for instance, the term “equivalent measures” raises many
questions: to what extent would measures be considered equivalent? Would it be on the type of
products, the amount of the carbon taxes, the goal of GHG emissions reduction? As Cosbey et al.
note, such a provision would also require defining countries’ compliance with the GATT.318
If an exporting country has implemented a national measure to reduce GHG emissions, its
exporters of carbon-intensive pollutant goods would not be subject to the carbon equivalency fee.
Again, there is some ambiguity surrounding the term “substantially equivalent measure.” If a
country has implemented a cap-and-trade regime, how would it be determined that it is a
“substantially equivalent measure”? Is the carbon tax in India, which is significantly lower that
what the CPA proposes, considered substantially equivalent? Under GATT law, the carbon
317 A Cosbey et al, A Guide for the Concerned: Guidance on the Elaboration and Implementation of Border Carbon Adjustment (Stockholm: Entwined, 2012) at 7 and 10. 318 Ibid at 11.
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equivalency fee would need to consider all climate change measures of other trading
countries.319
4.1.3.4 Could the CPA be saved under Article XX?
Assuming that the carbon equivalency fee under the CPA would be found in violation of GATT
obligations, could it be saved under the general exceptions of Article XX of the GATT? BTAs,
as indicated above, are often implemented to respond to carbon leakage and to preserve the
competitiveness of domestic products vis-à-vis imported products. Low et al. rightly indicate that
competitiveness is not a listed exception of Article XX. 320 If a measure only addresses
competitiveness issues, it has little chance of passing muster under Article XX exceptions. It may
be justified under the exceptions covering the protection of the environment (Article XX(b)) or
exhaustible natural resources (Article XX(g)).
Considering the design, architecture and structure of the current draft, the CPA would probably
be viewed as a measure to protect “human, animal or plant life or health” pursuant to Article
XX(b). It would be more difficult to prove that the measure is a necessary measure to achieve
these objectives. Indeed, the central reason for the carbon equivalency fee is not the protection of
the environment but rather to ensure that US carbon-intensive manufacturers do not have an
environmental handicap in competing against similar foreign producers within the United States.
However, the overall objective of the CPA could be interpreted as legitimate to protect the
environment. Of importance will be to determine whether the CPA contributes materially to the
achievement of reducing GHG emissions. While not impossible to ascertain, a tribunal will need
to weigh and balance all facts, which are not currently available for the purpose of this analysis.
WTO tribunals have explicitly specified that clean air and more broadly climate change are
“exhaustible natural resources.”321 To fall within the ambit of Article XX(g), the CPA will need
to relate to the conservation of exhaustible natural resources; have “a close and genuine
relationship of ends and means”;322 and not be “disproportionately wide in its scope and reach in
319 US-Shrimp at paras 161-164; Aaron Cosbey, Border Carbon Adjustments (Geneva: International Institute for Sustainable Development, 2008) at 4. 320 Low et al, supra note 59 at 512. 321 Brazil-Retreaded Tyres at para 151. 322 US-Shrimp at para 136.
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relation to the policy objective of protection and conservation.”323 In other words, the CPA must
be a measure whose policy goals are “primarily aimed at” or “directly connected with”324 the
conservation of clean air. Zarrilli and Burnett contend that the test is more easily complied with
if there are several measures aimed at reducing GHG emissions and improving clean air since
overall this shows the country’s objective to address climate change.325 This places the
legislation within a broader framework for climate change and ensures that it is not inadvertently
aimed at this. As indicated above, the prima facie objective of the CPA is to “address climate
disruption, reduce carbon pollution, and enhance the use of clean energy.” The CPA as a whole
would likely be considered a measure to reduce GHG emissions and be found to be in relation to
the conservation of clean air.326 In addition, the CPA will have to be “made effective in
conjunction with restrictions on domestic production or consumption.” Bacchus notes that the
fact that the underlying reason of a BTA is addressing carbon leakage “proves that a measure is
made effective in conjunction with restrictions” in a domestic market.327
Assuming that the CPA is justified under XX(g), the more challenging hurdle would be to prove
compliance with the chapeau of Article XX. As the gatekeeper of the general exceptions, the
chapeau ensures that a measure is not arbitrary and unjustifiable discrimination or a disguised
restriction to trade and that countries are acting in good faith when contravening to non-
discrimination principle. This analysis requires examining the “detailed operating provision” and
its application.328
The fact that the CPA recognizes that exporting countries may have implemented their own
“substantially equivalent method” which results in the expiry of the carbon equivalency fee may
be grounds for the CPA not to be found discriminatory.329 However, because the comparable
measure of an exporting country only applies to the carbon equivalency fee, a tribunal may find
323 Ibid at 141. 324 Ibid. 325 Simonetta Zarrilli & Jennifer Burnett, “Certifying Biofuels: Benefits for the Environment, Development and Trade?” in Thomas Cottier, Olga Nartova & Sadeq Z Bigdeli, eds, International Trade Regulation and the Mitigation of Climate Change: World Trade Forum (Cambridge: Cambridge University Press, 2009) 197 at 223. 326 US – Gasoline at pp 14-16. See also Pauwelyn, “BTA”, supra note 80 at 46. 327 Bacchus, supra note 137. 328 US-Shrimp at para 160. 329 For the argument, see Hufbauer et al, supra note 140 at 85.
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that the CPA does not offer sufficient flexibility to take into account other measures. The CPA
does not compel other countries to take actions to reduce GHG emissions, contrary to the
Waxman-Markey proposal which explicitly stipulated that one of its purposes was to induce
foreign countries and most notably fast growing ones to act.330
The CPA is also silent with regard to the possibility of negotiating with other countries.
Considering that in US-Shrimp, the AB found the United States had an obligation to conduct
negotiations with trading partners prior to enforcing the trade restrictions to avoid “arbitrary or
unjustifiable discrimination,” a tribunal is likely to find the same with regard to CPA. On the
other hand, the United States could argue that has made its best effort to negotiate a multilateral
climate change agreement. A tribunal would then need to determine whether the US efforts to
negotiate with other countries were sufficient and comparable.331
In sum, the carbon equivalency fee as currently drafted under the CPA could be found in
violation of Article III:2 if the evidence shows that it is de facto discriminatory. While it may be
saved under Article XX(g), given that its design, architecture and structure is more consonant
with environmental policies than economic, provided some clarifications on transparency and
process are added, it is not clear whether a panel would find consistency with the chapeau.
4.2 EU’s Sustainable Criteria for Biofuels
The EU has taken a leadership role in addressing climate change issues and implementing
legislative actions and programmes to reduce GHG emissions and decrease its dependency on
and consumption of fossil fuels. It has committed to reducing its overall GHG emissions by 20%
by the year 2020. As an alternative to fossil fuels and traditional energy, biofuels and its
cultivation have grown substantially.332 Some countries, like Brazil333 and Indonesia334 have
330 Waxman-Markey, Section 761(c)(1). 331 United States – Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 (Complaint by Malaysia) (2001), WTO Doc WT/DS58/AB/RW at para 122 (Appellate Body Report). 332 According to a UNEP report, world ethanol production for transport fuel tripled from 17 billion to more than 52 billion litres between 2000 and 2007. See “Assessing Biofuels” in Towards Sustainable Production and Use of Resources (excerpt) (Geneva: UNEP, 2009), online: UNEP < http://www.unep.org>
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developed a comparative advantage in biofuel production using abundant raw materials on their
lands such as sugarcane and palm oil. At the outset, a distinction must be drawn between first
generation biofuels335 (or conventional biofuels) stemming from feedstock (maize, sugar cane,
palm oil, etc.) and second generation biofuels (or advanced biofuels) produced synthetically,
which for the most part continue to represent an area of research and development (cellulosic
ethanol, biomass-to-liquids diesel and biosynthetic gas). First generation biofuels have been
heavily criticized due to their adverse impact on, inter alia, food security.336
Faced with increasing environmental and sustainability concerns regarding biofuel production,
the EU has implemented several important measures aimed at encouraging sustainable
production and the use of biofuels among Member States. Pursuant to the Renewable Energy
Directive (RED),337 each Member State must ensure that at least 10% of its domestic energy
consumption in transport comes from renewable energy by 2020. It also stipulates two
cumulative criteria for biofuels to be sustainable.
Argentina recently requested WTO consultations with the EU regarding, among others, RED and
its sustainability criteria. It contends that the EU directives as well as Member States’ legislation
333 The UN reports that in 2009 38% of the world’s ethanol production came from Brazil. UN Energy, Ethanol fuel in Brazil (8 January 2011), online: UN-Energy <http://www.un-energy.org/stories/38-ethanol-fuel-in-brazil>. 334 In 2011, Indonesia produced 1.52 billion liters in 2011. Its export increases from 563 million liters in 2010 to 1,225 million liters in 2011, with the EU being the primary export destination. John P Slette and Ibnu E Wiyono, “Biofuels Annual Report. Indonesia” (2012) USDA Foreign Agricultural Service, online: USDA <http://gain.fas.usda.gov>. 335 For the purpose of this section, biofuel means all types of fuel without any distinction regarding biodiesel, bioethanol, etc. Also while most countries grant massive subsidies to the biofuel industry, this aspect will not be discussed in this paper. 336 See Anselm Eisentraut, Sustainable Production of Second-Generation Biofuels- Potential and Perspectives in Major Economies and Developing Countries, (France: International Energy Agency, 2010), online: IEA <http://www.iea.org>. According to this report, first generation biofuels are essentially produced by developing countries, with Brazil, China, Thailand and Indonesia heading the trade whereas second generation biofuel remains at a preliminary development stage and is driven by developed countries such as the EU and the United States. The second generation biofuel sector is growing rapidly with a world capacity having reached 4.5 billion litres at the end of 2012, representing an increase of 30% from 2011. 337 EC, Commission Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (Text with EEA relevance) [2009] OJ L140/16 [RED].
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implementing them are in violation of, inter alia, Articles I, III:2 and III:4 of the GATT.338
Argentina claims that it does “not object either to the use of sustainability criteria or to a
methodology by which greenhouse gas emissions savings are calculated. In fact, the biodiesel
sector of Argentina stands out due to its environmental and social sustainability”.339 Argentine
soybean-based biofuel allegedly does not comply with the sustainability criteria and therefore
does not count toward the 10% target. In 2010, Malaysia also invoked the possibility of
challenging RED on the basis that its export of biofuel from palm oil was not treated favourably
in the EU because of the GHG emission sustainability criterion.340
The two sustainability criteria focus on how biofuel is produced and distinguish between the
production processes. Each aims at achieving different sustainable goals: one targeting the GHG
reduction and the other limiting land use and preserving ecosystems. The criteria prescribe which
processes and production methods for producing biofuels are considered sustainable. This
section will focus on the sustainability criteria and their consistency with WTO law, namely
Article III:4 and will briefly examine the exemption in Article XX. It will be argued that because
of the sustainability criteria, imported products are treated less favourably than like domestic
products, but that RED is likely to be held justifiable under Article XX.
338 Argentina further argues violation of the TBT Agreement, the SCM Agreement and TRIMS. European Union and Certain Member States – Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry (Complaint by Argentina) (2013), WTO Doc WT/DS459/1, G/L/1027, G/SCM/D97/1, G/TRIMS/D/36, G/TBT/D/44 (Request for Consultation), online: WTO < http://www.docsonline.wto.org>. 339 Ibid at 3. 340 IC Possible WTO Case over EU Palm Oil Restrictions?” (2010) 10:9 Bio Trade Res, online: ICTSD <http://ictsd.org>. Furthermore, a recent announcement of a proposal to the current biofuel directive to include indirect land-use change (ILUC) has spurred some commentators to say it would make RED discriminatory. ILUC occurs when agricultural land used for food production is transformed for crop cultivation and impact GHG emissions and calculation. A proposal has been put forward to introduce reporting estimated emi ssions from carbon stock changes caused by indirect land-use change, to calculate the life cycle of GHG emission savings from biofuels and bioliquids. For for a fulsome account of ILUC, see Emily Barrett Lydgate, “The EU, the WTO and Indirect Land Use Change” (2013) 47:1 J World Trade 159. Including ILUC changes the landscape of sustainable biofuels: most biodiesel would be considered unsustainable whereas most ethanol would remain compliant with RED. With ILUC, soybean would have a negative effect on GHG emissions reduction, which implies it would be considered as emitting GHG emissions. See Seth Meyer, Josef Schmidhuber & Jesús Barreiro-Hurlé, Global Fuel Trade. How Uncoordinated Biofuel Policy Fuels Resources Use and GHG Emissions (Geneva: ICTSD, 2013) at 16-17. See EC, Commission Proposal for a Directive of the European Parliament and of the Council, amending Directive 98/70/EC Relating to the Quality of Petrol and Diesel Fuels and Amending Directive 2009/28/EC on the Promotion of the Use of Energy from Renewable Sources, COM(2012) 595 final (17 October 2012).
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4.2.1 Renewable Energy Directive
The biofuel issue has been part of the climate change discussions in the EU for several years. As
early as 2001, the EU developed a strategy for sustainable development, which comprised
biofuels. This strategy was integrated in the 2003 directive aimed at reducing GHG emissions
and encouraging the use of biofuels for transport by setting the goal of a 5.75% share of
renewable energy in the transport sector by 2010. The EU released a Strategy for biofuels in
2006341 aimed at promoting biofuels in the EU and in developing countries as well as increasing
cooperation with developing countries in biofuels. Pursuant to RED, each Member State must
ensure that its share of renewable energy sources in transport reaches at least 10% of its final
consumption of transport energy by 2020.342 To count towards the 10% target, biofuel must
comply with an established set of sustainability criteria that apply to both domestic and foreign
products,343 namely setting GHG emission levels of biofuels and specifying the type of land
whence raw materials used to produce biofuel may not originate.
Article 17 (1) and (2) provides that biofuels must cause a GHG reduction of at least 35%, a level
which will rise to 50% in 2017 and to 60% in 2018. The directive establishes a calculation
method but also sets out the default value for each kind of biofuel; for example, sugar cane is set
at 71%, whereas palm oil is set at 19% (without methane) and at 56% (with methane).344
Emissions resulting from processing, transport and distribution as well as land-use change are
also included in the calculation.
The land-use sustainability criterion specifies that raw materials cannot come from: i) high
biodiversity land, namely land that had the status of primary forests and other wooded land, any
areas aimed at protecting endangered eco-system or species, or highly biodiverse grasslands;345
ii) high carbon stock, including wetlands, continuously forested areas or land spanning more than
one hectare with trees higher than five meters and a canopy cover of between 10% and 30%;346
341 EC, An EU Strategy for Biofuels, [2006] OJ 67. 342 Article 3(4) of RED. 343 Article 17(1) of RED. 344 Annex V of RED. 345 Article 17(3) of RED. 346 Article 17(4) of RED.
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and iii) peatland, unless the raw materials did not necessitate drainage of previously undrained
soil.347
4.2.2 Are the Sustainable Criteria Non-Discriminatory under Article III:4?
Although RED raises controversy regarding several GATT obligations, this particular analysis
will be confined to the possible violation of the national treatment principle (Article III:4) and
the application of the general exceptions (Article XX).348 Both sustainability criteria clearly
affect internal sale, offering for sale and purchase of biofuel within the EU and will therefore be
scrutinized under Article III:4. In assessing whether there is a violation of Article III:4 of the
GATT, the first question to address is whether sustainable biofuel and non-sustainable biofuel
are like products. Determining likeness includes an assessment of the competitive relationship of
the imported and domestic products in the EU. In the event they are considered like products, the
analysis turns to evaluating whether the imported products are treated less favourably than that of
domestic like products and whether such treatment is protectionist in favour of EU domestic
biofuel.
4.2.2.1 Sustainable Biofuels Like Unsustainable Biofuels?
The underlying issue of the likeness analysis regarding biofuel is whether (npr)PPMs can be used
to determine whether imported and domestic products are like. As argued in Chapter II,
production methods should be considered in the analysis of likeness. This approach would be
aligned with a recent statement by the AB: “[w]hat constitutes a competitive relationship
between products may require consideration of inputs and processes of production used to
produce the product.”349 Stated differently, do production processes affect the competitive
conditions in the biofuel market?
In examining the four traditional criteria – physical characteristics, end-use, consumers’
preference and tariff classification – sustainable and unsustainable biofuels are likely to share
347 Article 17(5) of RED. 348 For a more detailed and all-encompassing WTO analysis, see Malorie Schaus & Andreas Lendle, The EU’s Renewable Energy Directive – Consistent with WTO Rules (Geneva: ICTSD, Trade Law Clinic 2010). 349 Canada-FIT Measures at para 5.63.
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physical characteristics and end use. Relying on the GATT decisions in US-Malt Beverages,
which held that a determination of likeness goes beyond simple physical characteristics, some
commentators have argued that biofuels that have different GHG emissions could be considered
“unlike” because “the gas emissions created by burning these products are physical
characteristics.”350 Others, like Lydgate, have considered that the difference between GHG
emissions in biofuel would not affect its physical characteristics.351 She argues that “even on a
molecular level”352 the sustainable and non-sustainable biofuel would have similar physical
characteristics. Accepting the former view would require expanding the characteristics elements
to include the process of manufacturing.353 The analysis becomes more complex if different raw
materials are examined. Assuming corn ethanol releases more GHG emissions in its production
than sugarcane-based ethanol, would biofuel using sugarcane be considered like biofuel using
corn?354 The difference in raw materials does not affect the characteristics of the final product,
namely biofuel.355 While it can be argued that GHG emissions do not alter physical
characteristics in the “molecular” sense, they indeed affect the characteristics of a product and,
arguably, when considering climate change measures, the production process should not be
dissociated from the product. The amount of carbon or nitrogen released in the production, and
the use of chemical fertilizers all contribute to making the product. GHG emissions released
during the production of a product relate to its process and in extenso to the product.356 The
sustainability condition regarding land likely faces the same difficulties as described for the
GHG emission.
350 Andrew Mitchell & Christopher Tran, “The Consistency of the EU Renewable Energy Directive with the WTO Agreements”, Georgetown Business, Economics & Regulatory Law Research Paper no 1485549, October 2009 at 5. 351 Schaus & Lendle, supra note 348 at 20. 352 See Lydgate, “Consumer”, supra note 89 at 180. 353 See supra Chapter 3, Section 3.1.3. 354 Corn ethanol is generally considered a far greated contributer of GHG emissions than sugarcane ethanol; however, since corn ethanol is usually produced and consumed domestically, it does not have to include GHG emissions related to transportation contrary to sugarcane ethanol. LUC is also a significant GHG emission factor for sugarcane in comparision to corn, which on the other hand requires more fertilizers. See Michael Wang et al, “Well-to-Wheels Energy Use and Greenhouse Gas Emissions of Ethanol from Corn, Sugarcane and Cellulosic Biomass for US use” (2012) 7 Env Research Letters 1 at 9-11. 355 Schaus & Lendle, supra note 348 at 21. 356 For a comparable analysis, see Stephanie Switzer & Joseph A McMahon, “EU Biofuels Policy – Raising the Question of WTO Compatibility” (2011) 60 :3 ICLQ 713 at 729.
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Pursuant to RED, sustainable and non-sustainable biofuel would serve the same end, namely
transport fuel. Tariff classification would also be the same between sustainable and non-
sustainable biofuel.357 Biofuels have several uses and thus are imported under different tariffs
depending on their use. There are however no distinct tariff codes under the Harmonized System
codes for sustainable and unsustainable biofuel, bioethanol and biodiesel.358
The consumers’ preference factor poses the most difficulty in assessing likeness. As Charnovitz,
Early and Howse frame it, the thrust of the analysis will be whether there is sufficient evidence
to demonstrate that consumers make a distinction between sustainable biofuel and non-
sustainable biofuel.359 Lydgate suggests using surveys to objectively gauge consumers’
preference, yet, as she also points out, surveys may not reflect consumers’ actual behaviour.360
As informative as surveys may be in taking a snapshot of consumers’ habits ideally, when it
comes down to purchasing more costly sustainable biofuels, consumers may disregard
environmental motivations in favour of more money in their pocket.361
A pure economic approach to assess likeness in this case would require an analysis of the cross-
price elasticity of biofuel demand in the marketplace. This may prove difficult in regard to
sustainable and non-sustainable biofuel. Assuming that the price of corn skyrockets due to
droughts and an invasion of grasshoppers destroy a significant quantity of the harvest,362
countries or industrial consumers would likely turn to another source of raw material to blend
into the biofuel such as sugarcane or palm oil. While this may support a claim for substitutability
of the inputs, it provides for a twisted comparison of the competitive relationship. Indeed the
raison d’être of the sustainable criteria lies within the notion that the products must be treated
differently based on their social purposes. In my view, the economic approach would therefore
be misleading in that it would miss the fundamental issue of RED, which consists in
357 Biofuel has not been added to the Environmental Goods list in the negotiations. See supra Chapter 3, Section 3.1.1. 358 Schaus & Lendle, supra note 348 at 23 and Switzer & McMahon, supra note 356 at 727. 359 Steve Charnovitz, Jane Earley & Robert Howse, “An Examination of Social Standards in Biofuels Sustainability Criteria” (2008) IPC Discussion Paper – Standards Series at 10. 360 Lydgate, “Consumer” supra note 89 at 182-183. 361 According to market analysis from Nielsen, consumers in North America and Europe have different purchasing behaviours with regard to environment-friendly products. For further information, see infra Chapter 3, Section 3.3. 362 For the purpose of this example, I do not take into account the massive subsidies provided to the corn industries.
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implementing social conditions. Crops and feedstocks are subject to price volatility that may
influence their substitutability. An increase in the price of crops would lead to an increase in
energy prices and a reduction of biofuel use, perhaps for fossil fuel. Also, the production
externalities (increasing food prices and diminishing food supplies) are not accounted for in the
economic approach but should be considered within the environmental objectives.
Turning to other relevant factors, the contextual approach of the sustainability criteria should be
taken into account.363 The essence of the sustainability criteria as such is not physical. Instead,
sustainability criteria are social conditions that call for a type of production considered to be
more viable for the environment. Contrary to the EC-Asbestos case, providing evidence of the
health risk with respect to GHG emissions would be more complicated. Individual consumers’
choice may have less of an impact on environment because their actions weighs less than those
of industrial consumers (and governments) whose purchasing power is likely to have more
weight. In that light, the environmental purpose could be perceived as an important element in
opting for sustainable biofuels.364
In sum, the market-based approach would likely conclude that sustainable and unsustainable
biofuels are like products.
4.2.2.2 Less Favourable Treatment
Assuming the products are considered like, the second prong of the analysis requires examining
whether the imported biofuels are treated less favourably than domestic biofuels to protect the
latter. The sustainability criteria are de jure non-discriminatory since they apply to all domestic
and imported biofuels. As such they do not per se prevent any biofuel from accessing the EU
market. Biofuels must however comply with the two sustainability criteria to receive the
advantage of counting toward the 10% target. Hence, buyers in the European market have little
incentive to purchase biofuel not compliant with the EU sustainability criteria, which, in turn,
adversely affects the competitive conditions of imported biofuels vis-à-vis European biofuel.
While the sustainability criteria are voluntary and applied objectively, it can be argued that they
operate as de facto discrimination against imported biofuel.
363 Howse & Langille, supra note 91 at 408 referring to US-Clove Cigarettes at para 117. 364 Horn & Mavroidis, “BTA”, supra note 71 at 1917.
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Differential treatment may not be considered inconsistent with Article III:4 as long as it is not
related to origin. To determine de facto origin-based discrimination, it would be necessary to
map in detail the origin of each biofuel, a task well beyond the scope of this paper.365 It is worth
highlighting nonetheless a few numbers: the United States is the major ethanol producer (based
on corn); Brazil is the second largest ethanol producer (based on cane sugar and beet sugar);
Argentina is also a significant producer of biodiesel; other countries such as Malaysia, Indonesia
and Thailand also produce biofuel based on vegetable raw materials (palm oil, etc.).366 The EU
also produces biofuel, which is based essentially on rapeseed oil and corn. In 2011, the EU has
purchased from third countries €2 to €3 billion of biodiesel and €0.5 billion of ethanol.367 Out of
a total of 1,822 ktoe feedstock for bioethanol (wheat, maize, barley, sugar beet, etc.) consumed
in the EU in 2008, 1,381 ktoe (75%) came from within the EU, 296 ktoe (16%) came from
Brazil, 17 ktoe (1%) from Argentina and 33 ktoe (1.8%) from Pakistan. 368 For biodiesel, more
than half of the feedstock (rapeseed oil, soybean oil, palm oil, etc.) originates from within the EU
(57%), 10% from the United States (essentially soybean oil), 3.6% from Argentina (soybean oil)
, and 9% from Indonesia (palm oil). 369
This overview shows that even prior to the entry into force of RED, the EU heavily depended on
import of biofuel. The implementation of RED forecasts that its imports will continue to
increase.
When examining the structure and the design of RED as well as its application, it may be argued
that even if the sustainability criteria act as a form of discrimination vis-à-vis imported biofuels,
there is no clear evidence that the EU protects its biofuel industry. Indeed, as Schaus and Lendle
demonstrate, the default values do not favour domestic biofuel to the detriment of imported
biofuel because some biofuels produced by the EU are also subject to high default values.370
However, it has been argued that a legitimate regulatory distinction can justify a de facto less
365 For examples, see Schaus & Lendle supra note 348. 366 OECD-FAO, Agricultural Outlook 2012 – Chapter 3 – Biofuels, Agricultural Outlooks, (Paris: OECD, 2012) 87 at 94. 367 Chris Charles et al, “Biofuels—At What Cost? A Review of Costs and Benefits of EU Biofuel Policies” (2013) IISD and GSI Research Report, online: IISD <http://www.iisd.org>. 368 Ibid at 21. 369 Ibid. 370 See Schaus & Lendle, supra note 348 at 25-32.
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favourable treatment of imported products.371 As such if a panel applied the rationale set out in
the Trilogy of cases under Article 2.1 of the TBT Agreement to Article III:4 of the GATT, the
regulatory purpose would be incorporated in the interpretation of less favourable treatment and
might result in RED being found in compliance with Article III:4. This would therefore make the
GHG emissions criteria consistent with the Article, but the land-use criterion may not be found
consistent given that it de facto does not apply to lands in Europe but target lands of importing
countries. Schaus and Lendle have observed that most biofuel importers, such as Brazil and
Malaysia, produce ethanol form lands listed in the sustainability criteria whereas the EU’s land
are less biodiverse and consist notably of arable lands.372
The calculation of GHG emission, which includes transport costs, could also entail an element
invoking less favourable treatment. On the one hand because GHG emissions are released during
transport, it is consistent with the underlying objective of the directive to include transport costs.
On the other hand, it disadvantages imported biofuel, say from Indonesia or Brazil, compared to
EU biofuel. The application of transport costs could be found to be discriminatory. The land-use
sustainability criterion while prima facie neutral may also discriminate against imported biofuel.
This would require determining whether the EU has any of the identified lands under the
criterion and if so how much. Soybean and sugarcane, for instance, bear considerable
transportation costs in comparison to rapeseed oil or corn.
4.2.2.3 Article XX
Assuming the sustainability criteria were found in violation of the national treatment principle
under Article III:4, the provision could be saved under the general exceptions found under
Article XX. A justification may be accepted as falling within the scope of either XX(b) or
XX(g).373
371 US-Clove Cigarettes at para 182. Howse & Langille, supra note 91 at 410. 372 Schaus & Lendle, supra note 348 at 25-32. 373 Preamble (69) of RED. Lydgate indicates, the preamble of RED addresses directly the moral concerns that underpin the directive and thereby the implicitly alludes to Article XX(a) when it states: “Consumers in the Community would, in addition, find it morally unacceptable that their increased use of biofuels and bioliquids could have the effect of destroying biodiverse indirectly, see Lydgate, “Consumer” supra note 89.
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4.2.2.3.1 Article XX(b)
The exemption under Article XX(b) requires a measure to be considered necessary to protect the
life or health of humans, animals or plants. This requires weighing and balancing of the objective
and values of the sustainability criteria and the extent to which they contribute to “the realization
of the ends pursued” as well as “the restrictive impact of the measure on international
commerce.” A panel must be satisfied that the measure brings about a material contribution to
the achievement of its objective. Furthermore, a less restrictive trade alternative will be
considered only if it provides the same level of protection that RED seeks to provide and is
reasonably attainable in the EU.374
In the Preamble, the overarching objective of RED is described as reducing GHG emissions and
encouraging renewable energy in transport.375 More specifically, the GHG emission
sustainability criteria aim at reducing GHG emissions in biofuels376 and the land-use
sustainability criteria target the preservation of certain lands (biodiverse lands, peatland) and
their ecosystems.377 Production of biofuels requires the exploitation of significant land and the
use of certain lands can result in higher emissions than fossil fuel, through deforestation, for
example.378 A criterion therefore that seeks to prevent the use of lands to enhance carbon storage
and limit the destruction of wetlands would probably be considered as protecting the
environment and plants. The EU could therefore argue that its sustainability criteria protect the
environment and, more broadly, animals and plants that are not only affected by climate change
but also would directly be impacted by the destruction or deterioration of their ecosystems.
The sustainability criteria must then be found necessary to fulfil the stated objectives. As
indicated in Chapter 2, necessity does not mean indispensability.379 There is no doubt that
374 Brazil-Retreaded Tyres at para 171. 375 Preamble (1) of RED. 376 Preamble (69) of RED. 377 Preamble (70) – (73) of RED. 378 See Robert W Howarth and Stefan Bringezu eds, Biofuels: Environmental Consequences and Interactions with Changing Land Use, Proceedings of the Scientific Committee on Problems of the Environment (SCOPE) International Biofuels Project Rapid Assessment, 22-25 September 2008, online: CIP <http://cip.cornell.edu/biofuels>. The authors indicate that the conversion of rainforest and peat soils into land for the production of palm oil can emit greenhouse gas emissions 800-2000% higher emissions than equivalent fossil fuels. 379 Korea –Beef at para 161.
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reducing GHG emissions to address the overarching concerns related to climate change will be
considered important, and the GHG emission sustainability criterion contributes to the
achievement of this objective. Furthermore, the lands targeted in RED help towards the
mitigation of climate change because they can store CO2.380 It also directly relates to the
objective of preserving certain lands. It can therefore reasonably be maintained that there is a
“genuine relationship of ends and means between the objective and the measure.”381
Are the sustainability criteria the least trade restrictive available options? Considering that RED
and the provisions at issue are not an import ban but rather an imposition of social criteria that
are not per se mandatory, it would seem that their impact on trade would be considered least
restrictive and that no alternatives would reasonably ensure that the objectives set out are
attained.
4.2.2.3.2 Article XX(g)
Under XX(g), RED would need to relate to the “conservation of exhaustible natural resources”
and be “made effective in conjunction with restrictions on domestic production or consumption.”
In the previous case study on the US carbon tax, it was noted that climate change and clean air
are considered to be an exhaustible natural resource. Land can also be both renewable and
exhaustible. Given the importance of the types of lands identified in RED for carbon storage,
these lands would be deemed an exhaustible natural resource. In US-Shrimp, the AB held that the
relationship between the means and ends must be substantial. The degree of connection between
the application of the sustainability criteria and the goal of the directive, which is to reduce GHG
emissions, would seem important enough. Overall, both sustainability criteria, and RED as a
whole are aimed at reducing GHG emissions to mitigate climate change and would likely be
regarded as falling within the scope of XX(g).
380 Schaus & Lendle, supra note 348 at 45. 381 Low et al, supra note 59 at 509.
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4.2.2.3.3 Article XX - Chapeau
Under the chapeau test, the EU will need to demonstrate that its measure is neither arbitrary nor
constitutes an unjustifiable form of discrimination between countries where equitable conditions
apply, and further that it is not a disguised barrier to trade.
Arbitrariness and unjustifiable discrimination require an examination of the reasons that justify
the directive. As described above, the issue of biofuels has been part of the broader climate
change action agenda in the EU for some time. This long-standing importance would support the
claim that RED is not protectionist or arbitrary.382 In addition, contrary to the US-Shrimp and the
CPA case study, the EU directive provides a best endeavour effort to conclude agreements with
third countries either bilaterally or multilaterally with respect to sustainability criteria383 as well
as allowing alternative methods to calculate emissions, provided the EU accepts them. This
supports the finding that RED may be least trade restrictive and not unjustifiably discriminatory
The above analysis suggests that RED would likely be considered consistent under GATT. The
transportation emissions in the GHG criterion may however be considered discriminatory against
importing countries; however, under the less favourable treatment analysis a panel may choose to
give more weight to the regulatory purpose, in which case it may not contravene Article III:4.
Should RED be found in violation of the national treatment principle, it is argued that the
measure would be saved under XX(b) and XX(g).
4.3 The French Grenelle Ecolabelling
Ecolabels are instruments that are extensively employed to inform consumers of environmental
impacts of products or services and enable them to make enlightened and informed purchase
decisions based on their values and finances. Concurrently with an increase in consumers’
awareness of climate change, the demand for more and better information on the environmental
impact of products is growing.384 A recent UNCTAD report on the interconnectedness between
382 Howse & Langille, supra note 91 at 373 and 384. 383 Article 18(4) of RED. 384 Simon Bolwig & Peter Gibbon, Emerging product carbon footprint standards and schemes and
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agriculture and climate change in developing countries indicated that in the eventuality of the
weakness or even failure of schemes considered first or second-best carbon internalization
mechanisms such as taxes or regulatory measures, ecolabelling would likely become the third-
best internalization tool.385 On a wider scale, ecolabelling regimes contribute to protecting the
environment by enhancing climate change awareness as well as inducing producers to alter their
production processes from greater to lesser energy intensity.
Ecolabelling is thus connected with both the product per se and the production methods. It
represents a paradigm of PPM measures by tapping directly into the life cycle of a product.
While ecolabelling are based on PPMs, carbon footprint focuses principally on the sum of GHG
emissions as a result of the life cycle of the product, which requires an assessment of PPMs at all
stages of production including extraction, manufacture, transport and distribution. In fact,
stripped from indicating nprPPMs, an ecolabelling scheme is dispossessed of its fundamental
characteristics and would not achieve its purpose as it would not divulge a complete picture of a
product’s life cycle. Consumers would thus be misinformed or disinformed.
As indicated at the beginning of this chapter, ecolabelling is considered a soft measure in
comparison to a carbon tax, BTAs, and other regulatory measures, and even softer when it is not
compulsory. Green underlines that labelling is generally perceived as a suitable and
comparatively non-restrictive means for pursuing environmental goals.386 To be efficient,
ecolabelling should preferably complement other policy measures,387 such as a tax, since
labelling targets essentially consumption actions and can only have a limited effect on GHG
emissions.388
their possible trade impacts, Information Service Department Risø National Laboratory for Sustainable Energy, 2009. 385 Ulrich Hoffman, Assuring Food Security in Developing Countries under the Challenges of Climate Change: Key Trade and Development Issues of a Fundamental Transformation of Agriculture, UN Doc UNCTAD/OSG/DP/2011/1 at 31. 386 Green, supra note 131 at 186. Some WTO members such as Canada don’t consider labelling as least restrictive. 387 Tom Rotherham, “The Trade and Environmental Effects of Ecolabels: Assessment and Response” (Geneva: UNEP, 2005) 5 at 8 [UNEP 2005]. 388 Ibid at 9. See also Anne-Célia Disdier & Stéphan Marette, “How Do Consumers in Developed Countries Value the Environment and Workers’ Social Rights in Developing Countries” (2012) 37:1 Food Policy, Elsevier at 16 [Disdier & Marette, “Consumers”].
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Despite this softer characteristic, developing countries have long objected to and raised many
concerns regarding ecolabelling adopted by developed countries.389 As seen in Chapter 2, the
French environmental ecolabelling regime enacted under Grenelle Law 1390 and Grenelle Law 2
was no exception. The initial proposal of Grenelle Law 2 contemplated a mandatory ecolabelling
scheme applicable to all products and services but the final version settled for a voluntary one-
year pilot project. This section posits a hypothetical mandatory ecolabelling scheme based on the
original Grenelle initiative. While acknowledging that ecolabelling is also subject to, inter alia,
GATT Articles III:4 and XX as well as the SPS Agreement, this analysis focuses on its
compatibility with the TBT Agreement.
4.3.1 Nature of Ecolabels
Ecolabels can be mandatory or voluntary, administered by governments, officially recognized
bodies or private entities. On the one hand, the most restrictive labelling scheme and
concurrently the most environmentally efficient would be mandatory, provided that industries are
not so deterred by such a compulsory requirement that they elect another location to operate or
sell their product. On the other hand, a voluntary scheme with over restrictive requirements is
likely to find little support and not meet its objectives, thereby “fail[ing] in the market place.”391
In recent years, the private sector has taken the lead role in generating an increasing number of
ecolabels. These private initiatives have been a means for private enterprises such as retailers to
tap into this “branding” market to attract and target concerned consumers.392 Many important
private enterprises (producers or retailers) have implemented their own carbon label, for example
the French supermarket Casino,393 etc. The most emblematic example remains the Blue Angel,
first established by the German government in 1970 and now covering more that 11,700 product
389 See discussion, supra Chapter 3, Section 3.2.2.2. 390 Loi no 2009-967 du 3 août 2009 de programmation relative à la mise en oeuvre du Grenelle de l’environnement, JO, 5 August 2009. 391Aaron Cosbey et al, Environmental Goods and Services Negotiations at the WTO: Lessons from Multilateral Environmental Agreements and Ecolabels for Breaking the Impasse (Geneva: IIDS, 2010). 392 See for example Cardwell & Smith, supra note 150. 393 Casino, online: Casino <http://www.produits-casino.fr>.
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in the world.394 Whilst these private standards are voluntary, they have the effect of being quasi-
mandatory because these companies exercise control over a great deal of the market of their
suppliers, in particular the smaller ones. These schemes fall outside WTO jurisdiction since
private parties are not governed by WTO rules. Several non-governmental initiatives (either
through non-governmental organisations or private sector) have created and promote
ecolabelling that is essentially based on production methods. Some products private standards
have become the grounds for competitiveness through market differentiation.395
Little monitoring and harmonization of these different ecolabels contribute to the confusion of
consumers, who are overloaded with different information. Indeed the plethora of different labels
complicates the monitoring of the nature and quality of the environmental claim made. For
example, a carbon footprint label may not take into account the emissions from land use change.
Ecolabelling serves multiple purposes. First, it informs the consumer so she can make a
purchasing decision corresponding to her needs and values (ecolabelling as reacting to a
consumer’s preferences). Second it also influences her behaviour (ecolabelling as acting). Some
authors have qualified the consumer’s choice as a dialectical conversation between consumers
and producers.396 From a producer’s perspective, ecolabelling can trigger a change in production
methods and affect competition, which in turn is beneficial for addressing climate change as it
encourages producers to adopt more efficient methods throughout the supply chain. It is
generally assumed that accurate information is welfare enhancing if consumers change their
behaviour.397
Ibanez and Grolleau emphasize that ecolabels are a partial response to environmental
externalities because consumers’ purchase behaviour is geared toward their own interests and not
altruistically motivated.398 Many studies have examined the influence of ecolabelling on
394 Blue Angel, online: Blue Angel < http://www.blauer-engel.de>. This label has started integrating GHG emissions. 395 Spencer Henson & Steven Jaffee, “Understanding Developing Country Strategic Responses to the Enhancement of Food Safety Standards” (2008) 31:4 The World Economy 548 at 550. 396 Douglas A Kysar and Michael P Vandenberg, “Introduction: Climate Change and Consumption” (2008) 38:12 ELR 10825 at 10830. 397 Disdier & Marette, “Consumers”, supra note 388 at 16. 398 Lizette Ibañez and Gilles Grolleau, “Can Ecolabeling Schemes Preserve the Environment?” (2008) 40:2 Environmental Resource Economics 233.
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consumers.399 Some experts have concluded that consumers may express concerns for climate
change, yet their willingness to pay a price premium for eco-friendly labelled products is not
transposed into their consumption behaviour.400 In fact, according to studies conducted by
Nielsen, there is a significant distinction between consumers in North America and the EU
towards ecolabelling and environmentally-friendly products. While both express their concern
for climate change issues and would favour these products, European consumers demonstrate
more willingness to pay higher prices.401 According to some commentators, there is “limited and
conflicting evidence of consumer willingness to pay for carbon emission reductions beyond pure
energy savings or other personal benefit.” 402 Others argue that positive environment labelling
information influences more consumers than negative environment labels.403
It is generally believed that ecolabelling can negatively affect competitiveness by imposing
higher compliance costs. This is the view supported by many developing countries who argue
that ecolabelling reduces their access to developed countries’ markets; yet the evidence
supporting such a claim is not consistent and the results vary.404 Nonetheless, imposing labelling
requirements, whether mandatory or voluntary, imposes costs on exporting countries seeking to
continue having access to foreign markets. To guarantee or preserve its market access, a firm
will need to adjust to the requirements of its exporting markets. With respect to ecolabelling or
carbon footprint, a firm may be required to invest in equipment or carbon monitoring to comply
with certification. Developing countries’ exporters or small and medium enterprises (SMEs)
incur higher costs for compliance and certification with less capacity to absorb these costs.
399 For an overview of some of these studies, see Disdier & Marette, “Consumers”, supra note 388. 400 According to a survey in 2011, 48% of Americans said they were concerned about climate change, and 68% of Europeans. See Nielsen, Global Online Survey, Q1 2011, Sustainable Efforts and Environmental Concerns Around the World, 2011. Document on file with author. Nielsen Global Online Environmental Survey was conducted between March 23 and April 12, 2011 and polled more than 25,000 consumers in 51 countries [Nielsen, 2011 Survey]. 401 Many consumers reported a personal preference for eco-friendly goods, but large percentages of respondents report setting aside this preference and buying whichever product is cheapest, including 48 percent in North America, 35 % in Europe. See ibid Nielsen, 2011 Survey. 402 Mark A Cohen and Michael P Vandenberg, “The Potential Role of Carbon Labeling in a Green Economy” (2012) 34 Energy Economics S53 at S56. 403 Anne-Célia Disdier & Stéphan Marette, “Taxes, Minimum-Quality Standards and/or Product Labelling to Improve Environmental Quality and Welfare: Experiments Can Provide Answers” (2012) 41:3 Journal of Regulatory Economics 337. 404 Manoj Joshi, “Are Eco-labels Consistent with and World Trade Organization Agreements?” (2004) 38:1 J World Trade 69 at 71.
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Mandatory ecolabelling may cause some carbon leakage by inducing industries to change
production location or destination markets to avoid compliance with any ecolabelling schemes.
At the opposite end of the spectrum, it could also foster competition by encouraging businesses
to compete and integrate lower carbon intensive and GHG reduced production to gain a larger
share of the market.
4.3.2 Grenelle Laws 1 and 2
In 2009, France adopted Grenelle Law 1, an ambitious and broad environmental law, which
aimed, inter alia, at reducing GHG emissions by 20% in transport by the year 2020;405 reducing
CO2 emissions from the building sector by 75% by 2050; and encouraging the development of
renewable energy such that it would constitute at least 20% of final energy consumption by year
2020.406 Article 54 provides that:
consumers must have access to accurate, objective and complete environmental information on the overall characteristics of the product / packaging pair […] France will support the recognition of these same requirements on the European Union level. […] The methodology associated with the evaluation of these impacts will be discussed in consultation with the relevant stakeholders.
This article sets forth the principles and commitments for the ecolabelling regime in France,
which were further developed by Grenelle Law 2, adopted in 2010. Grenelle Law 2 followed
Grenelle Law 1’s principles and specified the priorities and actions to put in place, inter alia,
reducing energy consumption, preventing GHG emissions and promoting renewable energy.
With Grenelle Law 2, the French government intends to develop “the right to environmental
information”407 and permit consumers to obtain complete information on the life cycle of
products and services as well as their impact on the environment and climate change.
In its initial draft, Article 85 of Grenelle Law 2 leapfrogged into a mandatory regime across all
sectors of products and services by compelling an ecolabelling that reflects the “environmental
405 Article 9 of Grenelle Law 2. 406 Article 17 of Grenelle Law 2. 407 France, Vie publique, online: Vie Publique <http://www.vie-publique.fr>.
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price” of products and packaging along with certain transportation costs.408 The environmental
price is defined as an indicia showing quantitative CO2 emission over the life cycle of
products.409 In particular, Article 85 stipulated that the consumer is to be informed “by all
appropriate means of the carbon equivalent content of products and their packaging along with
the consumption of natural resources or impact on natural environments attributable to same
throughout their life cycle.”410
Considering the difficulty and pressures from businesses, the proposed Article 85 evolved into
Article 228, which, in its final version, states:
[f]rom 1 July 2011, and after consultation with all stakeholders of the relevant sectors, an experiment will be conducted for a minimum period of one year. The objective of this experiment is to inform the consumer, gradually and by any suitable method, of the carbon footprint of products and their packaging, and the consumption of natural resources or impact on natural environments that are attributable to these products throughout their life cycle.
A pilot project was then implemented for one year on a voluntary basis and was conducted with
the participation of 168 companies, 70 of which came from the agricultural sector.411 Overall it
was considered a success with 60% of the participating companies satisfied with the results.412
Ernst & Young’s assessment report of the pilot project recommends that in order to implement a
mandatory scheme throughout France, it should first introduce the measure incrementally by
putting in place a five-year transition period, thereby giving ample time to all sectors and
industries to prepare themselves and make adequate adjustments.413 The French government is
currently exploring the possibility of and examining the modalities to implement the labelling
scheme nation-wide.
408 France, Sénat, Commission de l’économie “Projet de loi portant engagement national pour l'environnement”, Rapport no 552 (9 July 2009), online: Sénat <http://www.senat.fr>. Author’s translation. 409 Ibid. Author’s translation. 410 Ibid. Author’s translation. 411 Other sectors include furniture, publishing, textile, paper, hygiene, cosmetics, construction. For further information, see Ernst & Young, Bilan des retours des entreprises sur l’expérimentation nationale de l’affichage environnemental, February 2012; online : Ministère de l’Écologie, de l’Environnement et du Dévelopement durable <http://www.developpement-durable.gouv.fr/IMG/pdf/Rappport_E_Y.pdf>. 412 Ibid. 413 Ibid at 80-81.
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4.3.3 The Hypothetical New Grenelle
Drawing from the above-described French ecolabelling scheme under the Grenelle laws, the
following section presents a hypothetical mandatory ecolabelling regime (New Grenelle) as
originally intended and drafted in Article 85 and evaluates whether it complies with Articles 2.1
and 2.2 of the TBT Agreement. This hypothetical will be based on a series of assumptions
stemming from labelling requirements developed under the pilot project.
The following assumptions are adopted: New Grenelle applies to all products both domestic and
imported; ecolabels must display GHG emissions, which includes carbon footprint and at least
one more significant specific environmental impact. Other elements, in a limited number, must
be displayed in order to ensure that the product does not indirectly and adversely affect climate
change since carbon footprint information does not provide complete indicators of the
environmental impact of a product.414 These additional criteria vary according to the category of
products and their relevance, as it may be more pertinent to provide water consumption for
agricultural products rather than the toxicity levels, which are more relevant for chemical
products.415 Carbon calculation takes into account all phases of the life cycle:416 from extraction
of raw materials to the transportation and distribution of the final product. It will be based on
either information that businesses can provide such as energy and water consumption, weight
and type of material used, types and capacity of vehicles, an average baseline provided by the
administering agency or a default value. There is no requirement regarding the quantitative value
of the indicators (like nutritional values provided for food products).417
414 AFNOR, online: <http://affichage-environnemental.afnor.org>. 415 Ibid. 416 The life cycle method would be consistent with ISO 14040 and ISO 14044. Commissariat général du développement durable, Le Point sur l’affichage des caractéritisques environnementales des produits – un enjeu majeur du Grenelle de l’environnement, April 2010, online: Développement durable <http://www.developpement-durable.gouv.fr/IMG/pdf/LPS39b-.pdf>. 417 Ibid.
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4.3.3.1 New Grenelle Consistency with the TBT Agreement
A country’s right to establish its level of protection is reflected in the Preamble of the TBT
Agreement.418 The first step requires characterizing New Grenelle either as a technical
regulation or a standard.
As suggested, New Grenelle would first be implemented on a voluntary basis to increase
feasibility and compliance; at the end of this transitional period New Grenelle would be
compulsory. The five-year voluntary period ensures that all products with or without
ecolabelling have access and are placed in the French market within the transition. New Grenelle
could be considered a standard pursuant to Annex 1.2 of the TBT Agreement. However, in the
light of the controversial finding of the Panel and the AB in US-Tuna III, which held that the US
measure was a technical regulation because its application was mandatory, a panel may decide to
qualify New Grenelle, in the transitory period, as a technical regulation.419 It could nonetheless
be maintained that precisely due to the existence of this transitional voluntary period, New
Grenelle can only be a standard until its compulsory implementation. It is not clear from the
foregoing assumptions whether other ecolabels would be accepted as equivalent to the New
Grenelle ecolabelling requirements. In the event they are, it would support the argument for a
finding of a standard because there is no compulsory application of the measure; however, if not,
a tribunal, following in the footsteps of US-Tuna III, may find that the labelling requirements are
necessary for a product to be sold as climate-change or environmentally-friendly.
As a standard, New Grenelle would be covered under the TBT Code.420 Articles D and E
embody the national treatment principle and the requirement that no measure create unnecessary
obstacles to international trade, respectively.
There is no doubt that New Grenelle would be considered a technical regulation once it becomes
mandatory and would satisfy the three conditions set out in EC-Sardines, namely that the
labelling scheme applies to an identifiable product or group of products, that the document lays
down one or more characteristics of the product and that compliance with the product
418 EC-Asbestos. 419 See Trebilcock et al, Regulation of Trade, supra note 9 at 311; Mavroidis, “TBT Compliance” supra note 148 at 15, the author maintains the AB cannot be right on this issue. 420 Annex 3 of the TBT Agreement.
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characteristics is mandatory.421
4.3.3.1.1 National Treatment
To satisfy the non-discriminatory principle, New Grenelle must then comply with Articles 2.1
and 2.2 of the TBT Agreement. Article 2.1 involves assessing whether imported and domestic
products are like and whether the imported products are treated less favourably than like
domestic products.
Like Products 4.3.3.1.1.1
Assuming New Grenelle is a technical regulation, it concerns nprPPMs. The competitive
relationship in the market between the imported products and like domestic products will
determine whether the products are like.422 This analysis centres on the consumers and whether
they would consider imported products to be in competition with domestic products. It suffices
that only some consumers but not all consider the imported and the domestic products highly
substitutable.423 In other words, the directly competitive or substitutable relationship must not
necessarily be found throughout the entire market but only in some part. This will likely be
important in examining the likeness of products in casu because, as explained above, some
consumers are indeed more concerned about climate change and would not consider the products
like whereas others would. Contrary to the US “dolphin-safe” labelling, New Grenelle labelling
does not compel labelling distinction based on process and does not force products to comply
with specific characteristics or conditions to be labelled: there is no requirement other than
displaying the information. At the same time New Grenelle restricts access to the French market
to any products without the ecolabelling information.
A panel may need to examine closely the component of consumers’ preference. Consumers are
the recipient of information displayed on the labels and exercise the act of choosing one product
over the other. If evidence demonstrates that a majority of consumers in France are concerned
about the environment and require more information, a tribunal may find that imported and
domestic products are not substitutable. Such an assessment requires a specific analysis of
421 EC-Sardines at paras 175-176. See supra Chapter 3, Section 3.1.5. 422 US-Clove Cigarettes at paras 115-120. 423 Ibid at 142.
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products, which is beyond the scope of this thesis, because, as explained above, not all imported
products will have a higher carbon footprint and New Grenelle may also negatively affect
domestic products. Another question to consider is whether after the five-year transitional period
consumers would be more aware and thus more sensitive to treating products as not like based on
the environmental information displayed on ecolabelling. Consumers would allegedly have been
trained to receive and would expect the information prior to making their purchasing decisions.
Less Favourable Treatment 4.3.3.1.1.2
Assuming imported and domestic products are like, a panel would then turn to assess whether the
former are treated less favourably than the latter. In US-Tuna III, the AB stated that Article 2.1
does not mean that “any distinctions, in particular ones that are based exclusively on such
particular product characteristics or on particular processes and production methods, would
per se constitute less favourable treatment within the meaning of Article 2.1.”424 According to
the findings in the recent Trilogy of cases under the TBT Agreement, detrimental effects on
imported products do not automatically amount to less favourable treatment if these effects
derive from the legitimate objective.425 Determining less favourable treatment thus requires
evaluating whether New Grenelle modifies the competitive conditions by favouring domestic
products over imported ones. Are the detrimental effects on imported goods exclusively
attributable to the legitimate regulatory distinction?426 New Grenelle is explicitly non-
discriminatory, yet some aspects may result in implicit discrimination favouring domestic
products.
The overall design and architecture of New Grenelle and, arguably its application, require the
same disclosure of information based on the same calculation methods for all products. Whilst it
is necessary from a climate change perspective to consider GHG emissions in transportation, a
panel may consider this component to generate a detrimental impact stemming from the origin of
the product since all imported products would have higher transport GHG emissions than
domestic products. Yet when examining GHG emissions as a whole, imported products would
not necessarily be disadvantaged since much lower GHG emissions at the extraction or
424 US – Tuna III at para 211; US – Clove Cigarettes at para 169; US-COOL at para 268. 425 US-COOL at paras 175ff and 287. 426 US-Tuna III at para 297.
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manufacturing stages may counterbalance higher GHG emission in transportation. Indeed, New
Grenelle requires that other impacts such as water consumption or toxicity also be displayed.
Since New Grenelle applies even-handedly, it would probably be considered consistent with
Article 2.1; however, the GHG emissions related to transportation and included in the calculation
of life cycle may provide grounds for a finding of less favourable treatment.
New Grenelle has been described above as an informative ecolabelling without requiring specific
quantities, like a nutritional label. Voon et al. contend that nutritional labels are likely not to be
found in violation of 2.1 and 2.2 of TBT Agreement because the information provided on the
labels is essentially informative.427 While this may be true, I would however argue that
nutritional labels have an impact on consumers’ choices thus influencing competitive conditions.
Chocolate chip cookies displaying a label with 19% cholesterol would likely be considered in
competition with chocolate chip cookies with 9% cholesterol. Ultimately, consumers may
disregard externalities as a reason for purchasing one product over another.
Contrary to the US measure in US-Tuna III, which focused on informing consumers on the type
of fishing process used, New Grenelle aims at providing process data that informs the consumer
on the climate change impact of a product. It does not force producers to opt for a specific
production method but allows producers to decide which production method to select depending
on the available resources and technology. Aluminum made with hydroelectricity will certainly
exhibit more water consumption than aluminum produced with natural gas. This would also
support the even-handedness of the measure.
4.3.3.1.2 Least Trade Restrictive under Article 2.2
Neither technical regulations nor standards may provide unnecessary obstacles to international
trade. Following the rationale in US-Tuna III, the necessity test under Article 2.2 entails a
weighing and balancing process to ensure that New Grenelle is not more trade restrictive than
necessary to achieve its objective but also “taking into account the risks non-fulfilment would
create.”428 The objective of New Grenelle is first to inform consumers and also to promote lower
GHG emission products to address climate change. Labels pertaining to GHG emission and
427 Voon et al, supra note 165. 428 US – Tuna III at paras 320-323.
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climate change issues would clearly fall within the legitimate environmental objective listed in
Article 2.2. One alternative measure would be to continue with a voluntary ecolabelling regime
which would be deemed more reasonable and less trade restrictive but unlikely to be as effective
in satisfying France’s ultimate objectives.
In sum, in light of the analysis, it is likely that New Grenelle, as a mandatory labelling regime,
would be held compliant with the Articles 2.1 and 2.2 of the TBT Agreement. While nprPPMs
may remain a controversial topic in the TBTC and CTE, they are more likely a political issue
than a legal one.429 Ecolabelling addressing climate change cannot be dissociated from
nprPPMs and should be considered under the TBT Agreement. Voluntary ecolabelling regimes
may be less trade restrictive than compulsory regimes yet from an environmental perspective
may also be less efficient. Imposing a mandatory informative ecolabelling or carbon footprint
regime, similar to New Grenelle, the objectives of which are to display objective information and
let consumers make the ultimate decision whilst producers are incentivized to alter their
production processes could result in an effective complementary solution to other measures to
combat climate change.
This chapter illustrated the climate change PPM problematic through the lenses of three concrete
examples. Each focused on distinct WTO rules to provide an overall assessment of the
problematic that PPMs can engender with regard to the specific tenet of national treatment under
the GATT and the TBT Agreement. Developing countries had flagged and discussed each
reviewed measure as significant concerns in the TBTC and the CTE as observed in Chapter 3. It
is more likely than not that these climate change PPM measures will face WTO challenges. If
found discriminatory, it is argued that they would may pass muster under the general exceptions
of Article XX of the GATT of Article 2.2 of the TBT Agreement. The next chapter will further
elaborate on the perspective of developing countries on climate change PPM measures such as
those involved in the three case studies.
429 See Joshi, supra note 404 at 87.
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Developing Countries and PPMs 5Climate change affects and will continue to affect developing countries more severely than
developed countries, with the poorest among developing countries struggling most. According to
a recent World Bank report,430 the projected increase in temperature caused by climate change
will have an effect on water availability and dryness, which will ultimately impact crop yields,
grasslands, agricultural production, ecosystems in Sub-Saharan Africa, South East Asia and
South Asia, resulting in “push[ing] households below the poverty trap threshold.” 431
Alongside with the concerns of economies and politics, climate change raises concerns of
equality and justice. Many criticize the green movement promoted in developed countries as a
prescription for developing countries to remain poor and without access to the same policy tools
as developed countries to attain growth.432 Developing countries rightly argue that they should
not hamper their economic growth in the name of climate change when developed countries
benefited from policy latitude to reach a developed state.
This thesis does not seek to examine this complex debate, rather, it adopts the premise that
climate change issues must be incorporated into trade to infuse growth and development.
Ignoring the nexus between climate change and trade will result in an ever-expanding disconnect
between market realities and the environment, and the costs of this disconnect are likely to be
felt in the long run in the form of catastrophic weather events and conditions. Climate change
measures based on PPMs bear both economic and environmental elements and imply know-how
and technological transfer. They implicate technological innovation and changes in the prices of
goods, two critical features that modify competition and technological opportunities open to
market actors, and even more so with regard to developing countries.433 Any burden, be it
financial or technical, that is incurred as a result of climate change-related PPMs will bear
significant consequences for developing countries and more adversely for the least developed
430 Potsdam Institute for Climate Impact Research and Climate Analytics, Turn Down the Heat: Climate Extremes, Regional Impacts, and the Case for Resilience, (Washington DC: The World Bank, 2013), online: World Bank <http://www-wds.worldbank.org>. 431 Ibid at 160. 432 See for example, Deepak Lal, Poverty and Progress: Realities and Myths About Global Poverty, (Washington DC: Cato Institute, 2013). 433 Paul Collier, Gordon Conway & Tony Venables, “Climate Change and Africa” (2008) 24:2 Oxford Rev of Econ Pol 337 at 348.
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countries among them. They may have less capacity to absorb and adapt to changes given weak
institutions and capacity (or the absence thereof) to implement adequate changes.
The previous chapters have discussed certain climate change-related PPMs and their still
contentious status under the GATT and the TBT Agreement. This thesis maintains that measures
based on PPMs and nprPPMs are covered by WTO Agreements. Not addressing PPMs risks
reducing the ability of the WTO to respond effectively to the increasing number of trade
concerns regarding climate change. Excluding them from the WTO, as some developing
countries continue to suggest, ignores their economic component and represents a failure to
regulate these measures within the international trade regime, which may in turn foster
discriminatory behaviour.
If developing countries continue to object to PPMs, it may have detrimental consequences in the
longer term for them. In the words of a former trade negotiator from Sierra Leone: “[d]eveloping
countries must surmount the psychological hurdle of PPMs and be strategic in defining their
interests.”434 From a market-based perspective, Howse echoes the sentiment when stating that:
“[t]he prevailing anti-PPM rationale in Geneva – and in the trade community more generally –
has grown out of sync with market realities, namely, the interest of significant numbers of
consumers in the environmental consequences of how a product is produced.”435 Yet, measures
based on (npr)PPMs pose considerable challenges for poorer countries with weak institutions and
lacking financial and technological capacities.
This chapter focuses on the features of PPMs expounded in Chapter 2 in the context of
developing countries and assesses the interface of their concerns with contemporary debates
within the WTO institution both at the quasi-judicial and political level.
434 Beatrice Chaytor, Sierra Leone, served as trade negotiator cited in Adil Najam, Mark Halle & Ricardo Melendez-Ortiz eds, Trade and Environment, A Resource Book 2007, (Geneva: International Institute for Sustainable Development (IISD), International Centre for Trade and Sustainable Development (ICTSD), 2007). 435 Robert Howse, Peter van Bork & Charlotte Hedebrand, “WTO Disciplines and Biofuels: Opportunities and Constraints in the Creation of a Global Marketplace”, IPC Discussion Paper, October 2006 referring to M Araya, “WTO Negotiations on Environmental Goods and Services: Maximizing Opportunities?”, Global Environmental and Trade Study (GETS), Yale Center for Environmental Law and Policy (June 2003) at 1-2.
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5.1 Developing Countries and the WTO Institutions
Any discussion of the issues affecting developing countries must first acknowledge that they
form a heterogeneous group composed of different interests and priorities: China and the
Kingdom of Lesotho are far apart in terms of GDP and have different challenges regarding their
economic, institutional and social development. In the PPM discussion, a country’s capacity to
absorb or adapt to technological changes resulting from PPMs may influence its flexibility to
consider PPMs within the WTO rules. The term developing countries often includes emerging
economies such as China, India and Brazil, although these countries have experienced such
flourishing growth in the past decade that their status should be considered separately from other
developing countries. In addition, within developing countries, least developed countries (LDCs)
will often raise specific issues, and how – or even if at all – they have recourse to the DSB or are
able to participate effectively in the discussion opportunities in the TBTC or CTE.
The landscape of environment and trade related to the “traditional” divide between developed
and developing countries has changed, and even more specifically regarding climate change.
Trebilcock et al. observe that climate change issues and ecolabelling, for instance, “do not
necessarily require the kind of North–South polarization characteristic of the debate over
environmental trade measures.”436 Similarly, Pauwelyn suggests that, with respect to both trade
and environmental regimes, countries are now regrouping based on commonalities of concerns
or interests.437 Chapter 3 illustrated that developed and developing countries have joined forces
on some aspects of the PPM debate, although on some specific topics such as
ecolabelling/carbon footprint the discussions exhibited a strong majority of developing countries
rejecting the proposition that any measures based on PPM be considered under WTO rules.
Many scholars have maintained that rules and processes of the WTO are tailored for developed
countries without regard to the different context of developing countries.438 On this view,
developing countries have been marginalized in the WTO institutions. This section will centre on
436 Trebilcock et al, Regulation of Trade, supra note 9 at 714. 437 Joost Pauwelyn, “The End of Differential Treatment for Developing Countries? Lessons from the Trade and Climate Change Regimes” (2013) 22:1 Review of European Community and International Environmental Law (RECIEL) 29. This shift, however, may cause to weaken the least developed countries’ position in the WTO as they don’t have weightier countries to represent their issues and voice them. 438 Dani Rodrik, Global Governance of Trade as if Development Really Mattered: Report Submitted to the UNDP, (New York: UNDP, 2001).
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the procedural and political paths that WTO provides to developing countries to raise their
concerns with regard to climate change PPMs.
Members have essentially three paths within the WTO to express their concerns on or opposition
to climate change PPM measures: through the DSB by challenging a measure (opposition),
through the various committees, for instance the TBTC and the CTE (concerns or opposition), or
through informal bilateral meetings (concerns). The latter path may be one that is more often
used, although it is not possible to assess its efficacy and how often developing countries resort
to it.
In their WTO dispute compilation, Leitner and Lester indicate that developing countries have
acted as complainants in 113 cases since 1995 and respondents in 96 cases.439 While overall it
can be said that developing countries have increasingly been active in challenging measures
before the DSB, in large part because of larger emerging market developing countries with more
financial, technical and legal capacities than other developing countries. However, a great
majority of developing countries have not used the recourse available. Nevertheless, some
developing countries have taken a lead in challenging measures that they deem discriminatory.
Seven out of the top eleven most frequent complainants are developing countries: Brazil (26
cases), Mexico (23 cases), India (21 cases), Argentina (19 cases), Korea (15 cases), Thailand (13
cases) and Chile (10 cases); over 40% of all complaints have been initiated by developing
countries.440 Thus far no African country has engaged in a challenge.441
Prior to Argentina challenging RED, climate change PPMs had not been the subject of a WTO
dispute settlement proceeding. In the TBTC, Argentina has voiced its concerns about and
objections to RED, in that the sustainability criteria used as the default value attributed to soya
biodiesel do not consider production methods used by producing countries.442 Argentina also
439 Kara Leitner and Simon Lester, “WTO Dispute Settlement 1995–2012 – A Statistical Analysis” (2013) 16:1 JIEL 257 at 259. 440 David Evans and Gregory C Shaffer, “Introduction” in Gregory C Schaffer and Ricardo Meléndez-Ortiz (eds) Dispute Settlement at the WTO – The Developing Country Experience (Cambridge University Press: Cambridge 2010) 1 at 2. 441 Trebilcock et al, Regulation of Trade, supra note 9 at 617 442 See G/TBT/M/57, G/TBT/M/58 and G/TBT/M/59.
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indicated that it attempted to discuss the issue with the EU bilaterally, which did not result in
progress.443
Developing countries have used the DSB mechanism in a limited capacity for several reasons. In
particular they fear that this mechanism might open the floodgates to challenges they could face
in the aftermath concerning labour or social conditions involved in production processes. The
Argentina challenge may not only encourage other developing countries to join as third parties,
but it may also finally provide an adequate factual setting to address the legitimacy of PPMs
within the GATT.
Considering that the DSB had a chance in US-Tuna III to clearly settle the PPM issues under the
WTO rules but seemed to have preferred to avoid the matter, PPMs will likely continue to be a
source of political friction. Another reason may also be that no country has yet implemented
BTAs and that many standards (especially ecolabelling) are voluntary and not administered by
the government or a governmental authority and as such do not fall within the WTO’s
jurisdiction. As discussed in Chapter 3, the recent Trilogy of cases under the TBT Agreement
seem to leave room for the contextual (regulatory) approach under the less favourable treatment
analysis of the national treatment obligation. While this could likely enable non-discriminatory
PPM measures to be found compliant with WTO rules, developing countries may be
disadvantaged by this interpretation as it would allow other countries to implement allegedly
discriminatory measures on the grounds of legitimate regulatory objectives. 444 Indeed Mayeda
argues that developing countries would benefit from the market-based approach focusing on
competitive conditions since developing countries want to avoid PPM measures that restrict their
market access and the contextual approach would not provide that.445
The fact that climate change PPMs have not been addressed at the DSB would seem to shift the
weight to discussions at the committee level where, arguably, more developing countries and
even LDCs contribute to the discussions and express their positions with regard to PPMs,
443 G/TBT/M/59 at para 2.136. 444 Graham Mayeda, “The TBT Agreement and Developing Countries” in in Michael J Trebilcock and Tracey Epps, eds Research Handbook on the WTO and Technical Barriers to Trade (Cheltenham: Edward Elgar, forthcoming in 2013) (draft). 445 Ibid.
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although, as indicated in Chapter 3, the discussions are stalled and no concrete outcomes have
ensued, leaving many developing countries dissatisfied.
Many countries have expressed their strong opposition to PPMs and the negotiating history of
the TBT agreement testifies to this.446 The review of CTE and TBTC minutes and reports shows
that developing countries have been quite outspoken about climate change-related PPMs.447
Even though some developing countries take part in the discussions, poorer countries do not
voice their concerns as often and as regularly as other more capable developing countries like
Chile, Argentina, India, Brazil, South Africa, Thailand, or Indonesia. This lack of participation
can be explained by a lack of necessary resources and negotiating capacities thereby
“exacerbating power imbalances.”448 Some authors have explained this by “the unwillingness of
members, especially developing countries, to ask each other embarrassing questions.”449 Indeed,
the positions discussed and the ensuing outcomes hence reflect the interests of the delegations
that can participate actively. Discussions on climate change in the CTE do not reveal a clear
North-South divide, although, as will be seen later, the EU takes a leading role in addressing this
issue. In the PPM debates,450 there is a clearer distinction between the positions of developed
and developing countries.
The essence of developing countries’ concerns raised in the TBTC and CTE discussions can be
summarized as follows: disguised restrictions on trade; financial and technological burdens; lack
of transparency regarding ecolabelling; divergent methods of calculating emissions and carbon
footprint and the proliferation of ecolabelling and private standards; and non-participation in the
elaboration of these standards.
446 As Marceau and Trachtman note, many developing countries have objected to unincorporated PPM and have challenged such measures with respect to labelling requirements based on social concerns or timber process. “The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the General Agreement on Tariffs and Trade” (2002) 36 J World Trade 811 at 861. 447 See supra Chapter 2. 448 V P Yu III, WTO Negotiating Strategy on Environmental Goods and Services for Asian Developing Countries (Geneva: ICTSD, 2007) at 4. See also Mavroidis & Wijkström, supra note 199. 449 Arunabha Ghosh, “Developing countries in the WTO Trade Policy Review Mechanism” (2010) 9:3 World Trade Review 419 at 443-444. 450 Teehankee et al, supra note 234 at 35.
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With respect to ecolabelling, developing countries’ concerns have evolved from general
ecolabelling to more specific carbon footprint requirements to the increasing use of private
standards. Particularly worrisome is the measure of life cycle environmental costs and the fact
that carbon embedded in a product is often higher when life cycle costs are taken into account.451
Furthermore, the fact that there are multiple methods of calculating carbon footprints increases
the burden for certain developing countries that need to comply with different standards to
maintain access to different markets.452
Although these concerns are real and have damaging consequences for exporters, the discussions
in these committees are only one facet of the actual problems that many exporters in developing
countries face. As Shaffer observes, producers originating in developing countries may not know
about the different options their government can initiate at the WTO or may not know how to
initiate complaints or raise concerns to ensure their interests are protected and therefore “suffer a
further disadvantage when compared to their better-connected and better-organized counterparts
in wealthier countries.”453
5.2 Illusory or Real? Challenges of Climate Change PPMs for Developing Countries
Production methods are as important as the product with regard to climate change policies. For
over 20 years, PPMs have had a “bad reputation” as policy tools embodying “protectionism” and
restricting market access. Developing countries often reproach the lack of transparency in the
design and implementation of PPM measures and the fact that they are not involved in their
design, thus making them “standard takers.”454 The examples set out in Chapter 4, namely
carbon tax and BTA, biofuel sustainability conditions and ecolabelling share all of these
451 WT/CTE/M/53 at para 11. 452 See for example, South Africa, ibid at para 16. 453 Samir R Gandhi, “Regulating the Use of Voluntary Environmental Standards Within the World Trade Organization Legal Regime: Making a Case for Developing Countries” (2005) 39:5 J World Trade 855 at 865 referring to Gregory C Schaffer, “The Public and the Private in International Trade Litigation” (16 August 2002), online: SSRN <http://papers.ssrn.com/sol3;papers.cfm?abstract_id=531183> 454 Keith E Maskus, Tsunehiro Otsuki & John S Wilson, The Cost of Compliance With Product Standards for Firms in Developing Countries: An Econometric Study, (Washington DC: The World Bank, 2005). See Mayeda, supra note 444.
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interlinked attributes. This section will examine these contemporary claims from developing
countries’ perspectives.
5.2.1 Green Protectionism
Developing countries are concerned that climate-change PPM measures may be used as “green
protectionism”, “eco-imperialism455 or “eco-colonialism”456 by developed countries.
Considering that PPMs are multipurpose and complex, they can be “easily hijacked for
protectionist purposes.”457 Under the pretence of climate change, developed countries would
implement measures that benefit their domestic industries over foreign exporters, which is
tantamount to de facto discrimination. While this protectionist behaviour may occur, it is
condemned by the WTO rules. Covering PPMs under the scope of the GATT and TBT
Agreement would ensure some form of control and safeguarding mechanism to counteract cases
of discriminatory PPM measures.
Some climate change-related PPM measures raise more misgivings than others. BTAs, for
instance, are often associated with the offset of competitiveness and may be seen as an
aggressive policy measure that disguises protectionism. Indonesia, for instance, has raised such a
concern.458 Any technological progress involving a widespread impact on the supply chain
inevitably results in changes that must be incurred by industries to remain competitive.
Outsourcing services to India or other developing countries have required service sectors in
Canada and the United States to redefine their services and markets.
LDCs are actors in the fuel and mineral extraction sectors. An eventual BTA may, depending on
its scope and breadth, slow their trade instead of spurring it. A report by the WTO Sub-
Committee on LDCs recently indicated that the world share of trade of LDCs in goods is 1.14%,
455 Charnovitz, supra note 2. 456 Frank Bierman, “The Rising Tide of Green Unilateralism in World Trade Law - Options for Reconciling the Emerging North–South Conflict” (2001) 35:3 J World Trade 421 at 422. 457 Olivier Cadot and Mariem Malouche, “Improving the Quality of NTMs through Regulatory Impact Assessment”, in Olivier Cadot and Mariem Malouche eds, Non-Tariff Measures, (Washington DC: The World Bank, 2012) 213 at 214. 458 See WT/CTE/M/52 at para 87.
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which reflects a growth in commodities exports. 459 Their exports consist mainly of petroleum
(oil and gas), textiles, and agricultural products, all of which are highly energy intensive. 460
Twelve African LDCs export extractives that represent more than 50% of their total exports.461
In 2011, developed countries remained the major destination market, but their share has
decreased to be replaced by China and India, with 53% of LDCs’ exports of fuels and mining
products are now destined for the Asian market.462 The major importing markets for LDCs’ fuels
and minerals are China, the EU, the United States and India. 463
This succinct portrait of LDC exporting trends illustrates the high dependency of LDCs on
energy intensive – as well as water – intensive products. These countries could theoretically be
directly affected by the proposed US carbon fee equivalency or any other carbon tax imposed on
raw materials or BTAs. In addition, countries seeking to wean themselves off their fossil-fuel use
will no longer be markets for LDCs. While this may trigger LDCs to turn to other new and more
environmentally lax countries – thereby causing carbon leakage – it highlights the problem these
countries will face with their dependency on fuel and mineral extractions.
Several analyses on the impacts of BTAs on developing countries lead to conflicting
conclusions. Some experts argue that BTAs may not be the most efficient way to reduce GHG
emissions and encourage developing countries to take action to address climate change. Reinaud
cites the fact that China’s exports to the EU and the US in emission-intensive products such as
steel, aluminum and paper were only 2% in 2007.464 A BTA on these products would have little
impact on Chinese exports. Similarly, Cosbey suggests that the impact of BTAs on developing
countries would be minimal in practice but he observes that “any precedent for the use of
459 WTO, Sub-Committee on Least-Developed Countries, Market Access for Products and Services of Export Interest to Least-Developed Countries (held on 1 October 2012), WTO Doc WT/COMTD/LDC/W/56 at 5-6. 460 Ibid at 11-12. 461 Aaron Cosbey, Competitive Impacts of Climate Change on LDCs’ Export Trade (Geneva: IISD, 2011) at 50 [Cosbey, LDCs’ Export Trade]. 462 Ibid. 463 Ibid at 14-16. 464 Reinaud, Carbon Leakage, supra note 280 at 77 referring to T Houser, “Carbon Tariffs – Why Trade Sanctions Won’t Work” (2008) 3 China Economic Quarterly 33, online: UNEP < http://www.unep.org/climatechange/Portals/5/documents/ClimateAndTradePoliciesPost2012_en.pdf>. See also Qiu Wei, Peter Wooders and Lucy Kitson, “Exposure of Chinese Exports to Potential Border Carbon Adjustments”, IISD December 2012, online: IISD <http://www.iisd.org/pdf/2012/tricc_exposure_chinese_exports_bca.pdf>.
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unilateral measures is not good for smaller and weaker countries.”465 Others have examined the
BTA on imports and exports using different baselines to measure carbon content and come up
with two different results. Accordingly, if domestic production serves as the baseline, it seems
that BTAs only impact developing countries slightly. Conversely, if the baseline is the carbon
content of imports, the effect of BTAs on developing countries would cause a substantial
decrease in their exports: to illustrate, India’s and China’s exports would decline between 16%
and 21%.466
5.2.2 Restrict or Impede market access
Unilateral climate change-related PPM measures imposed by importing (developed) countries
can restrict developing countries’ market access and increase the cost of exporting because of
higher compliance cost. Disdier and Fontagné demonstrate that non-tariff barriers under the SPS
or the TBT Agreements have little impact on trade among OECD members but significantly
shrink the exporting capacity of developing countries and LDCs to OECD countries.467 At the
firm level producers from developing countries must incur significant investment costs to adjust
their production methods to ensure compliance with standards and conditions in exporting
countries.468 Countries with weak institutions will bear higher certification costs. Access to
certification bodies can be difficult, because “procedures expensive [are] and managerial
infrastructure insufficiently developed to implement the right procedures.”469 All these elements
can act separately as deterrents to exports, but together have a damaging effect on market access.
In addition to increasing the costs to enter a market, climate change PPM measures may force
firms to change their technologies, which may represent a prohibitive investment for SMEs in
465 Cosbey, LDCs’ Export Trade, supra note 461. 466 Aaditya Mattoo et al, “Reconciling Climate Change and Trade Policy” (2009) Center for Global Development, Working Paper 189 at 18. 467 Anne-Célia Disdier, Lionel Fontagné & Mondher Mimouni, “The Impact of Regulations on Agricultural Trade: Evidence from SPS and TBT Agreements” (2007) CEPII, Working Paper No 2007-04, online: CEPII <http://www.cepii.fr/PDF_PUB/wp/2007/wp2007-04.pdf>. 468 Maskus, et al, supra note 454. 469 Micheline Goedhuys & Leo Sleuwaegen, “The Impact of International Standards Certification on the Performance of Firms in Less Developed Countries” (2013) 47 World Development 87 at 89.
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developing countries. The lack of technological know-how or investment and weak infrastructure
systems may prevent LDCs or developing countries more generally from adapting to new and
more sustainable technologies. Indeed having fewer resources to adapt or to understand PPMs
will generate higher costs for countries that need to react to any regulatory modifications that
affect their exported goods.470 On the other hand, these countries may have developed low
technology processes with lower environmental impact, which developed countries should
consider in designing their PPM measures.
These financial and technological adjustments can also act as deterrence for exporters in entering
new markets and reduce the possibility of diversifying commercial partners. Already established
companies may either choose to comply with standards to maintain their market share or find
another market. Many developing countries have better climate and geographical conditions to
produce agricultural products emitting less GHGs than some developed countries. Climate
change PPMs that include life cycle considerations pose an additional technical hurdle for
developing countries, who may lack the technical know-how or technology to appropriately
measure carbon footprint at all stages of production.471 Products may also originate from several
smaller producers, which complicates the capacity to measure or even monitor a product’s life
cycle.
Moreover, different sources of products, for instance low-quality (sour) oil versus high-quality
(sweet) oil,472 will not have the same GHG emissions. Garg et al. note that crude oil from Africa,
which is generally sour, emits the most GHG due to the technology used and the source as
compared to oil from the Middle East (usually high-quality).473 In calculating the life cycle of
oil, the authors included transportation costs and compared oil from these two important regions
for oil extraction. They conclude that the transportation emissions for oil exported from Africa to
India emit 0.80 GHG per kg of crude oil as opposed to 0.14 for oil originating from the Middle
470 Sykes, supra note 30 at 55. 471 Thomas Cottier & Matthias Oesch, “Direct and Indirect Discrimination in WTO Law and EU Law” (2011) NCCR Working Paper No 2011/16 at 25. 472 Sour crude oil contains larger amounts of the impurity sulfur, which is a corrosive element difficult to process, and deadly when released. When the total sulfur level in the oil is over 0.5 % the oil is called sour; lower sulfur oils are sweet: See Deborah Gordon, “Understanding Unconventional Oil” (2012) Carnegie Papers, online: Carnegie <http://carnegieendowment.org/files/unconventional_oil.pdf>. 473 Amit Garg, Saritha Vishwanathan & Vidhee Avashi, “Life Cycle Greehouse Gas Emission Assessment of Major Petroleum Oil Products for Transport and Household Sectors in India” (2013) 58 Energy Policy 38 at 43.
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East.474 Depending on the products, transportation and other life cycle stages entail more costs
for developing countries.
As highlighted in Chapter 2, the Cramer Report had estimated that biofuel certification costs
would translate into an additional cost of about 20% of production costs,475 a non-negligible
amount for small producers who may therefore be forced out of the market or decide to export
elsewhere to avoid these costs. Countries like Mozambique and Senegal, which are beginning to
compete in the biofuel sector can perhaps more easily adapt their production to the EU criteria
because they integrate the requirements at the very beginning of their production industry. The
situation may be more expansive for countries like Brazil and Argentina that have developed
their industries with their own production processes that may or not comply with the
requirements. For instance, Brazil produces it sugarcane-based ethanol with bagasse, considered
most efficient for reduced GHG emissions, yet this production method has not been officially
recognized as compliant with the EU’s sustainability criteria.476 In addition, bagasse serves as a
source for generating electricity in the internal Brazilian market.
Many developing countries possess better climatic conditions, land and low cost labour are more
available than in developed countries. However, not all developing countries have suitable
endowments to produce biofuels. Encouraged by the biofuel frenzy in developed countries, Sub-
Saharan African countries such as Mozambique and Senegal are establishing programmes to
produce biofuel, even though they can only process and absorb the final product in a limited
capacity, making them all the more dependent upon exports.477 Only 9% of arable land in
Mozambique was cultivated in 2008 and the rest was considered fit for biofuel production from
sugar cane or jatropha causing adverse effects on food production for the country.478 Biofuels
can allow developing countries to capitalize on their raw materials and own production methods
to become more competitive at the export level.479
474 Ibid. 475 Zarrilli & Burnett, supra note 325 at 210 476 Paul Waide & Nathalie Bernasconi-Osterwalder, “Standards, Labelling and Certification” (Geneva: IISD, 2008). 477 Siwa Msangi & Martin Evans, “Biofuels and Developing Economies: Is the Timing Right” (2013) Agricultural Economics 1 at 2. 478 Collier, supra note 433 at 351. 479 Cosbey, LDCs’ Export Trade, supra note 465 at 53.
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The expansion of biofuel production in developing countries responds to demand from
developed countries and their desire to reduce fossil fuel production.480 Biofuel production
represents a strong comparative advantage for developing countries, which can result in
increasing their trade volumes. It is however not devoid of negative repercussions such as
reducing feedstock cultivation or impoverishing arable lands.481 Developing countries may be
inclined to concentrate their production to respond to demands of developed countries, which
may in the longer term enhance their dependence on exports and prompt them to neglect
fostering growth within their region or diversifying their production to reduce their import
dependence.
While biofuel raises concerns of food security that will have severe consequences for developing
countries relying on food imports, the second generation of biofuels being developed provides an
optimistic outlook. For instance, the synthetic biofuel would free up arable land for food.
However, developing countries should start now, with the assistance of the private sector and
non-governmental organisations, to tap into the production of second generation biofuel, which
would allow them to have a first mover advantage.482
Furthermore, climate change PPM measures will be imposed on consumer goods. If costs are
passed on to the consumer, developing countries importing final products will have to absorb the
increase in price. As a result, climate change PPMs can directly affect poverty and distribution of
income. These measures can be devastating for the welfare and development capacity of
countries struggling to alleviate poverty among their populations.
5.2.3 Developing Countries as “Standard Takers”
Chapter 3 illustrated the type of concerns developing countries have raised regarding
ecolabelling, including carbon footprint labels. When labels include the entire life cycle of the
480 James Smith, Biofuels and the Globalisation of Risk: The Biggest Change in North-South Relationships since Colonialism? (London: Zed Books 2010) referred to in Carlo Carraro and Emanuele Massetti, “Energy and climate change in China” (2012) 17 Env and Dev Economics 689. 481 Garg et al, supra note 473 at 43. 482 Collier et al, supra note 433 at 352.
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product this enhances the difficulty for developing countries that have to include transportation
impacts, for example.483 Those countries without or with insufficient carbon efficient technology
will encounter great difficulty in obtaining the appropriate labels to access a market.484
Ecolabelling in general aims primarily at informing consumers and complementarily at reducing
GHG emissions, improving air quality and encouraging the use of production methods that are
renewable or not fossil fuel-based.
Ecolabels essentially pose two problems: they increase production costs and certification burdens
on exporting countries, whether the ecolabelling is voluntary or mandatory, and whether
governed by the government or a private third party; and they can also reduce the benefits
conferred on developing countries through the abolition of tariffs or the Generalized System of
Preference (GSP).485 Exporters then face more stringent conditions in gaining access to export
markets, inter alia, through costs of compliance and logistical difficulties. Yet, ecolabelling is
increasingly required as consumers become more aware of climate change consequences. This
awareness varies across countries, and the population in developing countries is often less well
informed and educated about climate change although they experience the effects of climate
change more significantly than many developed countries.486
The abundance of ecolabelling and the great variety of standards create an additional obstacle to
trade for manufacturers in developing countries. Most labelling initiatives have been initiated in
developed countries excluding the input and participation of developing countries. However,
these standards and labels have a direct impact on the agricultural or industrial sectors in
developing countries. It enhances the challenges for developing countries gaining market access
to developed countries and in diversifying their markets “to avoid being stranded by one market
and impacted by a sudden decline in demand.”487
Producers from developing countries are concerned with carbon footprint standards because they
are imprecise, vary from one country to another, and are shaped by the assumptions hidden in the
483 Appleton, supra note 11 at 134. 484 Ibid. 485 Gandhi, supra note 453 at 860. 486 Baddeley et al, supra note 216 at 64. 487 Sykes, supra note 30.
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life cycle data inventories and models on which they are based.488 Brenton et al. identify
attributes specific to developing countries that make it more difficult to calculate carbon content
and thus for them to comply with ecolabelling requiring life-cycle assessment than for developed
countries. Examples of difficulties where life cycle data are not easily obtained include
transportation costs (for products that are delivered by air whereas boat transportation emits
fewer GHGs); low yields; and conversion of forests or grasslands into cropland or pasture.489
The land use change and indirect land use change is a significant environmental problem because
many developing countries convert their natural lands to supply developed countries and thereby
reduce carbon capture lands such as forests. Also the more they capture carbon the more they
release it back upon conversion.
Pott suggests, like many other commentators, that voluntary standards are perceived as a threat
by developing countries because they cannot participate in their design and elaboration,490
thereby making them “standard takers.”491 If developing countries were to be involved in the
process of developing standards, then there may be a risk that to accommodate developing
countries, standards would degenerate to the lowest common denominator.
Furthermore some developing countries have incorporated into their internal markets
ecolabellings developed with developed countries standards in mind. To illustrate, the Forest
Stewardship Council (FSC) and the Marine Stewardship Council (MSC), both of which have
designed labelling standards comprising the production methods of timber or fish492 have been
integrated in many developing countries’ policies. However, the discrepancy between the
requirements of these labelling standards and the market reality in the African countries enhance
the difficulties in implementing them. For instance, the MSC certification process does not
correspond to the market reality composed of small-scale producers. The FSC also experiences
difficulties in implementation due to factors such as the different types of forest in Africa, which
488 Baddeley et al, supra note 216 at 70. 489 Paul Brenton, Gareth Edward-Jones, & Michael F Jensen, “Can Carbon Labeling Be Development Friendly? Recommendations on How to Improve Emerging Schemes” (2010) 27 Economic Premise (The World Bank). 490 Pott, supra note 11. 491 See Mayeda, supra note 444. 492 See in general Forest Stewardship Council https://ic.fsc.org/ and Marine Stewardship Council http://www.msc.org/; see also Steven Charnovitz, “International Standards and the WTO” (2005) George Washington University Law School, Legal Studies Research Paper No. 133.
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vary from one region to the other.493
As indicated in the previous chapter, there is a plethora of private standards, and those are only
subject to WTO rules insofar as they are enacted by non-governmental bodies with legal
authority to do so. However, developing countries will also be subject to private standards that
are operated by private actors without any recourse to the WTO, whether at the DSB or through
the notifications and Committees.
5.3 New Strategy Ahead for Developing Countries
Detrimental environmental effects together with policies implemented to address them may
incentivize developing countries to modify “the routes used in the past to diversify their export
and product base.”494 Yet not all developing countries envisage PPMs as an impediment to
market access and trade. Chile, for example, has been focusing on finding ways to leverage
PPMs to its advantage: “[t]rade liberalization had helped to increase revenue, and the availability
of technologies at lower costs. The effects of international trade and transportation did not have a
unique negative direction, but also opened opportunities.”495
Developing countries could find other markets with less stringent climate change PPM measures,
but this would tend towards an increase in carbon leakage and would not be efficient in the long
term. Vossenaar notes that developing countries have become the world’s largest and fastest
growing markets for environmental goods, the markets in developed countries being mature by
comparison.496
Epps and Green propose the use of trade measures as incentives (carrots) to encourage other
countries to comply or adopt climate change obligations, such as GSP schemes, which may
“improve social, environmental and economic opportunities,” and give the EU and the US GSP
493 UNEP, “Ecolabelling – as a Potential Marketing Tool for African Products (an overview of Opportunities and Challenges” (Geneva: UNEP, 2007) at 10ff. 494 Jodie Keane, “Diversifying Exports in the Context of Climate Change” (2011) Overseas Development Institute – Background Note. 495 WT CTE M 52 at para 73. 496 Rene Vossenaar, Climate-related single-use environmental goods (Geneva: ICTSD, 2010).
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as examples of ways to overcome the protectionist characteristics of PPMs.497 However, a carrot
can easily become a stick, and using GSP as trade measures would pressure developing countries
into committing to multilateral agreements or other climate change obligations.498 While the
GSP has benefitted developing countries, the asymmetrical bargaining power remains important
in these negotiations.
Epps and Green also suggest other carrot-type measures for developing countries such as
technology transfer, and capacity building to be put in place with the assistance of developed
countries.499 Such measures would likely need to be provided as aid or technical assistance by
developed countries or other organizations. These may be perceived as less radical by developing
countries as long as they can be put in place in a cooperative manner. As discussed earlier in this
chapter, implementing PPMs cannot be confined to production methods but they must be
considered as a whole comprising knowledge and technological capacity as well as financial
means. Developing countries may either be lacking thereof, which would support technology
transfer and know-how or they may have developed other processes adapted to their own context
and perhaps not necessarily contributing to climate change, which should be encouraged and
included in determining standards. Developed countries may want to be cautious and not impose
their way while disregarding developing countries’ equivalent ways.
Ideally what would also be most beneficial for all would be to involve developing countries in ex
ante consultation and elaboration of the measures, even though it should be noted that this may
result in a more protracted process that may be less efficient or productive in terms of climate
change policy.
Developing countries can also expect export opportunities in climate change measures like
ecolabelling: as seen, developing countries have climate conditions that favour the production of
certain products through processes that do not emit as much GHGs as production in developed
countries; many developing countries may be using low-energy-intensive production, thereby
offsetting the transportation of GHG emissions.
497 Pott, supra note 11 at 5. 498 Epps and Green, supra note 5 at 188. 499 Ibid at 177.
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Due to stringent climate change measures imposed by developed countries that affect the global
supply chain, developing countries are often impacted by these requirements. While many
experts have demonstrated that this results in loss of market share for exporters from developing
countries,500 it could be perceived as a temporary shock effect until developing countries adjust
to the new requirements. Indeed, as Trebilcock and Giri observe, comparative advantage relies in
most part on the ability for a country to produce and process products differently and more
efficiently than its competitors.501 To be able to absorb technological advances will require
assistance from developed countries because most developing countries lack infrastructure,
know-how, financial support and mechanisms to make efficient changes to their production
processes. Relying on an assessment of food standards, Henson and Jaffee argue that instead of
decreasing the competitiveness of developing countries, meeting stricter standards would provide
new form of competitiveness (comparative advantage), and may prove to be more sustainable in
the long term for developing countries.502 It may be transferable to the context of climate change
related PPMs, where developing countries could capitalize on the opportunities and reposition
themselves as competitive exporters.
500 Baddeley et al, supra note 216. See also Henson and Jaffe, supra note 395; A Portugal-Perez, J D Reyes and J S Wilson, “Beyond the Information Technology Agreement: Harmonization of Standards and Trade in Electronics” (2010) 33 The World Economy 1870 at 1897. 501 Trebilcock and Giri, supra note 71 at 57. 502 Henson and Jaffe, supra note 395.
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Conclusion 6Developing countries must be involved and participate in the negotiation of a global agreement
to efficiently combat climate change. What is required is a common distributive solution to
respond to a common distributive concern. What is also important is to increase the capacity
developing countries have to participate in WTO institutions and to further their participation in
standards elaboration processes. This will require know-how, technological capacity and the
participation of developed countries. Any concrete and efficient progress on climate change
issues requires some form of PPM measures and from a trade perspective an integrated approach
to PPMs to prevent discriminatory measures.
As it has been expounded production processes are crucial in the climate change context because
they enable shifting from fossil fuel to cleaner technology in a more sustainable fashion. PPMs
convey both the economic and public policy features of climate change: they set out restrictions
of processes for an internal market (which has trade implications for importing countries) and
they aim at correcting market failures through internalizing externalities. Countries will therefore
inevitably implement climate change measures based on PPMs.
This thesis developed primarily as an exercise to situate the PPM debate in the specific context
of climate change. It purports to assess to what extent the WTO institutions provide effective
mechanisms to address the concerns raised by developing countries over the fact that PPMs may
restrict their market access. The result of this examination reveals some – long overdue –
openness in the DSB to consider PPMs in the analysis under the national treatment principle. The
scope of discussions in the Committees demonstrates the significance of PPMs in global trade
relationships, but at the same time the content of these discussions cannot hide a certain triteness
in how little action is consolidated among Members toward a multilateral global solution
It first sketched the controversies that PPMs have been provoking for more than twenty years.
Countries are signalling an increasing political willingness to respond to concerns over global
commons or public policies embracing environmental, climate change, health, or labour issues.
While countries traditionally regulate on matters within their respective territories, these global
concerns have pushed regulations outward such that they impact on other states’ interests and
behaviour. With new technologies incorporated in production and process as a means to respond
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or influence public policy concerns on climate change, PPM measures are central as they
translate the duality or balance between a state’s right to regulate and the public policy and
economic interests within and outside their territoriality. Of particular relevance for trade is the
fact that by focusing exclusively on attaining climate change policy objectives, countries seem to
discriminate in favour of clean technology and low-carbon products and services.
Chapters 3 and 4 presented the legal and quasi-judicial life cycle of three specific climate change
PPM based measures, namely the US Climate Protection Act of 2013, which would impose a
carbon tax and a BTA on imports, the EU’s biofuel sustainability criteria and finally the French
mandatory ecolabelling scheme. The discussion of each of these measures in the Committees and
the analysis of their potential compatibility under the WTO rules showcase the tangible concerns
over these measures (and others) raised by developing countries. Each case study represents a
useful measure to incentivize other countries to implement cleaner production methods. Each
also raises a number of trade difficulties. Members and the WTO institutions need to face these
difficulties and find solutions to endorse climate change policies.
Developing countries have enhanced their participation in the Committees and their use of DSB
recourses. This increase engagement signals that their concerns are voiced and taken into
account. With regard to climate-change related PPMs, there seems to be slower progress in that
developing countries continue to maintain the same caution: PPM measures constrain or block
their market access and impose greater burdens on their exporters. This thesis does not argues
that these claims are baseless, but rather that developing countries together with developed
countries cannot stay entrenched in these positions if they wish to move forward and effectively
on climate change issues from a trade perspective. The nexus of trade and climate change has
fully integrated the market and the economic trade relationships. It is now the turn for the WTO
institutions to catch up and ensure that they can respond to upcoming challenges in the climate
change context.
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